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    Bitcoin crash: Cryptocurrency's weird relationship with weekends, explained

    Bitcoin crash: Cryptocurrency's weird relationship with weekends, explained

    Bitcoin crash: Cryptocurrency's weird relationship with weekends, explained
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    By Yashi Gupta   IST (Updated)


    Bitcoin and other cryptocurrencies crashed over 20 percent Saturday. Bitcoin, the largest cryptocurrency by market cap, was trading at $48,000, down nearly 15 percent at 20:40. The coin had plunged by $10,000 to $42,000 within an hour, early on Saturday. The prices then bounced slightly. While volatility in equity market could have caused this crash, could it have been exacerbated by the weekend effect -- Bitcoin's weird relationship with weekends?

    Bitcoin and other cryptocurrencies crashed 20 percent Saturday in what was a slightly late reaction to the stock market sell-off over the discovery of the Omicron variant of coronavirus and a hawkish Federal Reserve.
    Bitcoin, the largest cryptocurrency by market cap, was trading at $48,000, down nearly 15 percent at 20:40. The coin had plunged by $10,000 to $42,000 within an hour, early on Saturday. The prices then bounced slightly.
    Ether, the number two coin, had followed Bitcoin's movement, plunging over 10 percent. Other coins in the crypto-verse were deeply in the red too. Shiba Inu, the famous Doge-killer was down over 10 percent and Dogecoin itself was down over 14 percent. Cardano, Solana, and Polkadot were all down over 13, 10, and 18 percent, respectively, per data from coinmarketcap.com.
    While the movements in the cryptocurrency market are, more often than not, inspired by mysterious factors, this time, the volatility in the stock market seemed to have caused this reaction, per a WSJ report.

    Federal Reserve chief, earlier on Tuesday, had said the central bank was prepared to tighten easy monetary policy at a quicker than expected pace. This had investors worried as a new coronavirus threat has also emerged the previous week. While its impact on the economic recovery is unknown, markets were spooked.
    The tech-heavy Nasdaq ended the week down by 2.5 percent. The S&P 500 declined over 1 percent. The Dow Jones Industrial Average fell nearly 1 percent. While markets had started reacting to the Omicron threat on Black Friday and continued to react to Fed's hawkish stance over the week, cryptos reacted very late to these unhappy turn of events. A week late, to be exact.
    The entire week, while there was no big upmove in Bitcoin (it traded almost flat) there was no downmove either. The prices were almost stable at the $57,000-$56,000 level in the Asia session.
    One could also take into account the new monthly job figures released Friday. The report showed, while the unemployment rate has dwindled in November, job growth has been sluggish. The US economy added 210,000 jobs last month, the smallest gain since December '20.
    However, one cannot overlook Bitcoin and other cryptos' weird relationship with weekends. Take today's example. The price plummeted early Saturday.
    It is on Saturdays and Sundays when most of the asset classes are on holiday mode, that crypto volatility spikes, data shows. This phenomenon has been observed in the crypto market for several years now, Stephen McKeon, a finance professor and partner at Collab+Currency, a crypto-focused investment fund had told CNBC earlier in June.
    Liquidity requires a steady supply of both buyers and sellers. If there are fewer buyers than sellers or vice versa, transactions become harder – a situation that results in a spike or crash.
    "People always tout Bitcoin as 24/7,365 liquidity, but what actually means is you have periods of very thin liquidity," Nic Carter, partner at crypto venture firm Castle Island Ventures told Bloomberg. "If you want to deploy $500 million Bitcoins, you probably want to do it during core banking hours," he added.
    The market's 24/7 operation has set the stage for price swings when you least expect it. But is that it? Let's find out.

    Less trading
    One of the reasons, according to what Amin Shams, professor at Ohio State University told CNBC, for weekend volatility is 'fewer trades'. When trading volumes are thin, price swings become magnified.
    The market volumes rebound on Sunday night as Asian banks get ready to open and then US banks follow, McKeon continued. Then there are crypto influencers like Elon Musk, his one tweet sparks an entire wave of activity that lasts for weeks.
    Market structure
    The Crypto market consists of scores of disconnected exchanges, that are, in effect their own islands of liquidity. All these platforms trade with their own policies due to the lack of a centralised market structure, akin to say, equity.
    “If you think about the structure that makes it conducive to things that are going to be very volatile and where you are going to have big moves. That’s obviously going to be impacted by when people are trading, when people are awake, when people are watching the markets,” Greg Bunn, Chief Strategy Officer of CrossTower told Bloomberg.
    Staffing issues
    The reasons for describing this phenomenon are many. Some believe since market-makers are less staffed on weekends, the market reacts by rising or crashing.
    According to the efficient market hypothesis, the market should expect less liquidity on the weekends, but “it is a feature of the market that has always been there and we expect that it will be a feature of the market that remains in the future,” Teddy Fusaro of Bitwise Asset Management told Bloomberg.

    Margin trading
    A burgeoning crypto lending adds to the volatility. Traders borrow from the exchanges to buy more coins. When the coins dip below a certain level, they must repay the debt, an event called a margin call.
    But imagine traders not being able to repay the exchanges. The exchanges then sell the currency and get their money back.
    These cases intensify on weekends as banks are closed during that time. With no money, traders struggle to repay the borrowed funds, triggering a sell-off. That drops the price further, Shams said.
    Market manipulation
    Traders may also try to artificially manipulate the market to book profits. “There are a lot of studies that show there is (market) manipulation,” Shams told CNBC. But we don’t know the extent of manipulation.
    A 2019 research showed that Tether – crypto coin tied to the US dollar – artificially inflated bitcoin and other cryptos during the 2017 crypto boom.
    However, analysts have mixed views on this. “I have personally not seen any conclusive evidence that suggests manipulation,” McKeon added.

    This copy was earlier published in June 2021. It has been updated to incorporate the latest changes.
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