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Andrew Onofrinko | moment | Getty Images
bitcoin It rose sharply this month – but not for reasons you might think.
The world’s largest digital currency is up more than 12% since the beginning of June. On Wednesday, its price surpassed $30,000 to reach its highest level since April 14, according to CoinMetrix data.
Market players attributed the jump to the news that US asset management giant BlackRock has applied for a Bitcoin spot trading fund to track the market price of the underlying asset.
While this may be part of the reason, the huge movement can be traced back to another factor beyond the news flow surrounding large institutions taking steps to embrace bitcoin or other digital assets.
Weak liquidity and senior players
The “depth of market” for cryptocurrencies has remained at extremely low levels this year. Market depth refers to the market’s ability to accommodate relatively large buy and sell orders. When market depth is low and large players place orders to buy or sell digital currencies, prices can move up or down dramatically, even if the orders are not huge.
Market depth is a measure of the liquidity in the market.
According to the data company SidewalkBitcoin market depth is down 20% since the beginning of this year. Kaiko said that bitcoin was one of the hardest hit cryptocurrencies in terms of market depth.
Bitcoin’s market depth of the 1% range has fallen by about 20% since the start of the year, according to data firm Kaiko.
Sidewalk
“The recent rally in Bitcoin’s value has been largely driven by large trades within a less liquid market,” Jamie Sly, head of research at CCData, told CNBC via email.
“Our analysis of market orders above 5 bitcoins reveals a significant increase in buying in the market, indicating that major players are seeking to gain exposure to the digital asset.”
“When you combine large orders with poor books, the market is subject to more volatile moves,” Sly added.
The lack of liquidity was partially fueled by regulatory scrutiny of the cryptocurrency industry by US authorities. The Securities and Exchange Commission has filed a lawsuit against major exchanges such as Coinbase and Binance.
Low liquidity, which has been a feature of the cryptocurrency market all year, is also partly a reason why Bitcoin is up 80% year-to-date.
Retailers aren’t back — yet
Another notable feature of the current crypto market is the low volumes being traded on the exchanges.
The daily trading volume in the cryptocurrency is currently around $24 billion, according to crypto data site CoinGecko.
This is down significantly from more than $100 billion in total bitcoin trading volume during the cryptocurrency’s peak rally in 2021, when bitcoin soared near an all-time high of nearly $69,000.
Large cryptocurrency investors usually hope that an early price rally will be enough to entice retail investors back into the rally that eventually boosts the prices of Bitcoin and other digital currencies. But this did not happen.
“What is remarkable about this rise is that overall trade volumes are at their lowest levels in several years and we are only seeing a slight increase, which even then is well below the levels we saw in January-March,” says Clara Medley, Director Research at Kaiko, for CNBC.
“I think volumes and volatility are two of the most indicative indicators of cryptocurrency market activity. Both volatility and volumes are at multi-year lows, and even a rapid price increase is not enough to attract traders.”
“It is not a market for ordinary customers”
In the recent bitcoin cycle, the market momentum has been largely driven by big institutional names such as investment banks from Morgan Stanley to Goldman Sachs Establishing trading desks to give their clients exposure to the digital currency.
However, the market really only started to take shape when retailers started to take notice — in early 2021, people became enamored with the phenomenon that were NFTs, or non-fungible tokens, and other more speculative bets.
Later that year, the cryptocurrency market experienced a seismic rise, as the price of Bitcoin soared to unprecedented levels. It was in conjunction with a surge in trading volume, which jumped from $21.2 billion at the beginning of 2020 to $105.4 billion on November 9, 2021, when bitcoin hit an all-time high, according to CoinGecko.
Today, trading volume is nowhere near where it was at the height of the cryptocurrency boom in 2021.
“Any good news, if professional traders are trading — otherwise they’re not,” Carol Alexander, professor of finance at the University of Sussex, told CNBC.
“If a little bit of good news comes out like a bitcoin ETF, they fire the guns up.”
BlackRock’s ETF filing followed a similar move by Invesco and WisdomTree, which have also advanced their own bitcoin-related products.
“Both bitcoin and ether are manipulated in this way by professional traders. They don’t trade most of the time, they just wait until some good news comes out,” Alexander said.
“Then they’ll sell the top and you’ll have a sideways market.”
In fact, Bitcoin has been trading within a range this year, and attempts to rally have been greatly thwarted.
Alexander believes bitcoin is likely to trade in the $25,000-$30,000 range for the remainder of the summer.
However, she predicts that by the end of the year, the cryptocurrency will rise towards $50,000, citing attempts by larger market players to support the market, with large purchases making huge moves.
“It’s not a market for regular customers. It really isn’t,” she warned.
Has the market bottomed out?
Vijay Aiyar, vice president of international markets at Indian cryptocurrency exchange CoinDCX, told CNBC that he suspects that the recent rally in the bitcoin price is being driven more by “long-term institutional buyers.”
He added that cryptocurrency-focused large funds and hedge funds are among the market participants leading the action.
“I don’t think that’s a big boost to retail, as retail has been completely dumped during the recent downturn,” he said.
Many cryptocurrency industry insiders have expressed hope that the market is approaching a “bottom” period where it could start to rally again.
The recent price action mirrors the activity in 2018, when bitcoin’s price and volume were depressed for several months before starting to rise again the following year.
However, CCData’s Sly said that it is “still too early to say whether the worst is over for bitcoin.”
“The recent wave of interest from traditional financial institutions, such as BlackRock, Citadel and Fidelity, is instilling renewed optimism in the market,” he said.
“Provided that the broader macro environment and stock markets are favorable, it is possible for Bitcoin to maintain its current positive price trajectory.”
He watches: Can Ethereum dethrone Bitcoin as the crypto king?
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