One of the most common mistakes traders make when analyzing cryptocurrency markets is taking the supply and demand data from exchanges and the volumes traded at face value. When conducting this type of analysis, the trader should exclude the trading venues mentioned in various ‘bogus trade volumes’ reports, such as the one Bitwise published in March 2019.
There’s really no way to tell if major exchanges inflate their volumes by granting special access and zero fees for market makers.
Even the exchanges themselves have no way of knowing if a group of users is related or if they conduct multiple transactions with each other to inflate prices or volumes. There are hundreds, if not thousands, of influencers pumping out and downloading chat rooms, business apps, and the like.
Therefore, not all exchanges or laundering transactions between related entities have been generated by exchange or crypto projects with a foundation or a marketing team.
As Philip Gradwell, chief economist at Chainalysis explained:
“If you want to invest a lot of money in cryptocurrencies, you must increase your confidence that there are actually good trading venues […] If it’s an exchange and you have good incentives to report actual volume, it can actually become institutional, money comes in, but if you don’t have those incentives, they will stay away. “
Investors often speculate that these unethical practices only occur on exchanges located on remote islands. However, the US Commodity Futures Trading Commission fined Coinbase after an employee “self-listed” to create the illusion of volume and demand for Litecoin (LTC) before September 2018.
In case you were wondering, decentralized exchanges (DEX) have also been used for ‘wash trade’ activity as there are hardly any impediments aside from network gas fees.
Bitcoin price on Coinbase, USD (left) vs. Bitfinex BTC Margin Shorts (right). Source: TradingView
Notice how the short 22,000 Bitcoin margin surge on Bitfinex started when the price fell below $ 34,000 and held steady as Bitcoin continued to decline.
Hourly price candles on Coinbase show a descending pattern that perfectly matches Bitfinex’s short margin activity. However, it is worth noting that the expiration of Bitcoin’s $ 2.5 billion monthly options occurred at 8am UTC, about an hour before the price action highlighted above.
Furthermore, the expiration of CME futures occurred at 3pm UTC, which could involve 12.6k Bitcoin contracts worth $ 412 million. However, there is no reason to believe that derivatives maturities are directly related to Bitfinex’s short margin increase.
One must analyze the volumes of spot exchanges to understand whether Bitfinex played a major role in the Bitcoin price correction initiated in the early hours of June 25.
Bitcoin spot trades aggregate volume. Source: Coinalyze
The hourly volume candles for the past four days clearly show a significant increase in Bitfinex’s market share as of 9am UTC on June 25. The movement lasted seven hours, but mostly dissipated soon after.
Traders might also have been spooked by a similar move earlier this month, when Bitfinex’s margin shorts spiked to 25,000 BT C, just before the price started a week-long slide to a low of $ 28,800 on May 22. June.
Such events may or may not result in a profitable trade for the bears, usually making a strong impression on traders. After all, not everyone has the margin to sell 22,000 Bitcoin, worth $ 726 million.
In summary, there is a clear indication that the market slowdown had little to do with derivatives maturity, as Bitfinex’s increase in spot volumes coincided with the increase in margin shorts. However, once the pressure is gone, Bitcoin could regain the $ 32,000 support, which could be enough to motivate buyers.
Weekends tend to show lower volumes, so it will be interesting to see how cautious investors are against this gigantic short seller.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trade movement involves risk. You should do your own research when making a decision.