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Reports show some evidence, though not conclusive, that institutional investors may have played a role in the recent Bitcoin price drop with many expecting it to test the $7,500 support before recovering.
Bitcoin and the entire crypto markets arena are in chaos currently after an abrupt drop in Bitcoin network’s hash rate that resulted in heavy losses on September 24. Some analysts also believe that eh recent drops are as a result of a disappointing launch of the much-anticipated Bakkt platform.
On that day, Bitcoin price dropped sharply, losing up to 15% of its value in hours confirming a bearish reversal. All that happened as investors focused on Bakkt’s low Bitcoin trading volume and it opened the doors for a test of the critical $7,500 support. The crypto encountered selling pressure around $9,700 and dropped to a 3.5-month low of $7,998.
Bitcoin had been on an uncertain ground after Tuesday’s volatility band breakdown. Furthermore, some indicators now show the strongest bearish bias in nine months. That slide may have resulted from a long squeeze, when investors sell long positions to cut losses in a falling market. That creates further downward pressure on the prices.
Although the price drop was imminent, its magnitude has caught many by surprise. On September 24, Bitcoin fell by 11.83% representing the third-biggest single-day drop of 2019 as per Bitstamp data. Many now wonder; what caused these sharp drops?
Is There Manipulation?
New research shows a “striking systematic trend” in Bitcoin price movements. CME’s futures contracts on Bitcoin have become a reliable indicator of Wall Street’s institutional interest in the crypto markets. The primary reason for that is that these CMEs can only be traded by seasoned professionals. Notably, the token loses more than average before CME’s bitcoin futures contracts become settled every month.
For the past four months, TrustNodes has pointed to manipulation. Bitcoin has lost 2.27% towards settlement each month versus a mere 0.06% on a random day during the same time. This week, analysts expect another major price fall as the CME bitcoin futures settle on September 27.
Researchers also found the average price movement up 0.04% after adjustments for “large outliers”. On the other hand, the period before CME Bitcoin futures contracts are settled the price falls by 1.99% on average. Thomas Lee in Fundstrat also pointed over a year ago that there are significant declines before Bitcoin futures settlement. That presents an opportunity for easy profits. In that context, Arcane’s Bendik Norheim Schei wrote:
“Statistically, it is highly unlikely that the price falls in advance of CME settlement should be caused by mere coincidence.”
The futures contracts are vulnerable to manipulation since they are settled in dollars and not in BTC. Moreover, the settlement price is subject to the Bitcoin price in the underlying market. Hence, no Bitcoins are transacted but instead, it is just an overlying market traded in dollars.
Further Analysis Necessary
A possible scenario is where the Wall Street traders buy ‘physical’ Bitcoin in the spot market and sell the Bitcoin futures contracts. That way, their position is secured against price fluctuations. If Bitcoin surges, they lose on the short position but counteract the losses using the long position that rises in value.
Towards the settlement date of the contracts, investors sell off their ‘physical’ Bitcoin causing a price drop in the spot market. If that scenario occurs, the value of their short position rises to enable them to earn a simple profit on futures contracts upon settlement. Some research supports a hypothesis that the BTC price is manipulated in advance of CME settlement.
But, figures do not point to any “deliberate manipulation” but they support investors’ strategy of hedging. For now, it is not yet clear how institutional investors influence the price of Bitcoin. As we published earlier, a chart presented by Skew Markets reveals that institutional interest for CME’s Bitcoin Futures has dropped. Therefore, more evidence is needed before it is determined what role the institutional investors play in the plunge of Bitcoin prices.
Bitcoin May Soon Recover
On Tuesday, more than $550 million worth of Bitcoin long positions were liquidated on BitMEX. According to a fractal analysis published by CryptoBullet on September 20th, the volatility will continue but in favor of the bulls. Notably, Bitcoin’s 2017 Bull Run started in a descending triangle that in the end broke down on an impressive way.
Interestingly, BTC first plummeted a few days before re-entering the triangle and surging to new all-time highs. Tuesday’s price action seems to relive the chart formation from mid-2017. However, back then Bitcoin was at a different price and had a fundamental backdrop that was more bullish than now.
Analysts believe that if the fractal plays out in full, the Bitcoin price should get back on course to a new all-time high by the end of this year.