Latest news about Bitcoin and all cryptocurrencies. Your daily crypto news habit.
Disclaimer: This is not investment advice, merely my opinion on where the market sits right now and the opportunities that exist. Do your own research. Only invest what you can afford to lose.
Another Correction, just bigger.
At the time of writing this, the entire crypto market is undergoing a massive correction. It has been a bull market for the last couple of months and things have been rallying to new all time highs. This canât go on forever, and this is not new.
All bull markets, though it is more apparent in the crypto market, undergo this process. A rally to a new all time high, followed by a correction, rinse and repeat. When speaking in terms of cryptocurrency, this correction can be anywhere from 10% to 50% or more. Yes, that is a lot, but so are 300% increases over the course of the month leading up to it. During this correction money leaves the entire market and almost every asset is affected. Itâs not entirely fun to be apart of, but one could argue that this correction is necessary in order to correct the value of overinflated assets that donât actually have any sort of tangible value.
Granted, during this correction, the price of all assets are affectedâââeven those that have utility and true underlying value. What this creates is an opportunity for the savvy investor. Obviously it is near impossible to time the absolute bottom of a major correction, but getting in at any point after the price corrects by half will maximize your potential profits. Again, this is under the assumption that you invest in viable projects with a team and product, and not just vapourware. Over the coming weeks and months, they will continue on with development and the price will start to trend upwards.
I thought that past performance is not indicative of future results.
Well, in most cases this is true. In the case of January in the crypto markets, there seems to be a trend. As seen in the charts below, there seems to be a trend of capital leaving the market, always occurring in the first couple weeks of January.
Why does this keep happening?
Perhaps chance? Other external factors? Pure volatility in the market? I am sure there are many factors that play into the runs and corrections, but there seem to be two that may indicate why we are seeing this current correction.
Lunar New Year
While this may be hard to believe, when you look closer into it, it begins to make some sense. Asia dominates crypto-trading by volume and accounts for the majority of money moving in and out of the market. To put this simply, people are selling off some of their holdings in order to travel and buy presents. The Lunar New Year is equivalent to Christmas, so for those investors in China or Korea, they are gearing up with gifts and purchasing plane tickets leading up to the special date. This sell off has happened 3 weeks before the Lunar New Year every year, for the last 4years.
Having a hard time believing this? Well this article talks about how the Lunar New Year is the largest mass migration of people on the planet. It is projected that close to $100 billion USD is spent on average. Remember that the crypto market is quite opposite of the traditional stock market. During the holidays, business is booming, which leads to stock prices booming. The key difference is that crypto investors, for the most part, are retail investors, not Wall Street investors. Retail investors sell when they need a bit of extra cash, like during the holidays. I would be willing to bet that credit cards balances, on average, see significant increases during November and December in North America. The holiday season just exemplifies this behaviour in the crypto market.
In addition to people selling in preparation for the Lunar New Year celebration, people may also be selling for tax deferral purposes. Depending on where you live, if you sell now you get to take profit and defer tax liability until March 2019. This obviously differs across Countries, but the beauty of the crypto market is that it is universal.
Bitcoin Futures Expiring
On December 10, 2017, Bitcoin Futures were introduced into the market. These first Bitcoin futures were set to expire on January 17. Strangely enough, this market correction began just a week or so leading up to this date. Though the amount of money that went into these future contracts was not significant enough to entirely cause this correction, it may have been still been a large catalyst. Letâs break it down.
- In this scenario, the price of Bitcoin is $15,000
- A hedge fund buys 10,000 Bitcoin and at the same time hedges their position by taking on 10,000 short position future contracts at a price of $15,000 per contract.
- Whether the price of Bitcoin goes up to $50k or down to $5k, the hedge fund could theoretically sell all 10,000 BTC when the contract expires (Jan 17) and in tern mitigating future volatility risks.
- However, lets assume that they decide to sell their collection of Bitcoin a few days, or even a week before the future contracts expire. This can lead to two possible scenarios:
- The Bitcoin that they dump into the market has no major effect on the price and all remains stable. Regardless of the price of Bitcoin being $5k or $50k they are able to convert that into fiat currency in order to settle their expiring futures contracts. They no longer hold the Bitcoin and are no longer susceptible to future volatility risks, and they settle their futures contract with fiat currency.
- The Bitcoin that they, and other hedge funds, simultaneously dump into the market cause a dip in price. Even if this is only a $1,000 price dip, that is effectively $1,000 less that they own on every single futures contract. The amount the price moves is typically compounded because other investors react to the sudden price change caused by the hedge funds large sale. The further the price dips, the more profits they stand to make. The hedge funds can use the fiat currency from selling Bitcoin to settle their futures contracts, and they now keep whatever amount the âdipâ was as additional profit. Heck, they could even reinvest back into Bitcoin and this new bottomed out price point.
Personally, I believe that the second option is a more likely scenario in this unregulated market.
The reason this strategy wouldnât work on the âlongâ side is because the days leading up to the future contracts expiry, it would require the hedge fund to buy a large amount of Bitcoin in the attempt to spike the price upwards. In this scenario, they would then be stuck holding Bitcoin after the futures contracts close, which keeps them exposed to future market volatility. Since the futures contracts are settled in fiat currency, not Bitcoin, it is obvious why the large fund investors prefer the short strategy.
Us small investors largely contribute to allowing this to happen because of our greed and emotions. The market is full of small fish trying to chase the next âmooning coinâ in an attempt to make a quick buck. Rather than doing the appropriate research, money is just thrown into blind bets, and as a result we have a large number of new, overextended investors who are easily moved into panic selling during a flash-crash or major market correction. In doing this, we allow the large hedge funds to maximize their profits in the above strategy.
In years from now we will watch Netflix documentaries on the crypto traders who were able to make fortunes based on an unregulated market using futures contracts and price manipulation. Luckily, futures only exist on Bitcoin at the current time. Unluckily, the entire market is positively correlated with major price moves in Bitcoin, hence the current situation we are in.
Will things come back around?
This I cannot say with certainty. The future is unknown. What I do know is that a lot of assets that accumulated massive, over-inflated market caps have seen the appropriate corrections. Whether the money flows back into those assets, or into more legitimate projects, only time will tell. Although this particular correction is significantly bigger than ones in the past, they are not uncommon and sometimes you have to just sit patiently and wait.
What I can tell you is that there is a major discount on almost everything in the crypto/blockchain markets. Personally, I am scooping up some cheap assets and holding until February or so when I believe the market will come back to normal.
Perhaps I am just looking for ways to justify my current investment, or putting more money into the market. I could be wrong, but then again, I could be right.
Last January vs. this January
If you are new to the crypto markets and have no clue where to start, I recently wrote an article that should help walk you through the process of getting yourself set up and making your first crypto investment. Check it out here.
Andrew
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.