Single traders appear to still have an outsized influence on the bitcoin market.
Thus far in September, analysts have cited single traders as the likely cause of two significant price movements, both of which point to liquidity problems in the nascent market. In a time when bitcoin markets are characterized by low trading volume and speculation, bitcoin prices have become vulnerable to the point where either a single buyer or one, large transaction can trigger sizeable shifts.
For example, on Sunday, 11th September, bitcoin prices plunged more than 5% in less than an hour, according to BPI data.
During just a half-hour session, the digital currency fell from $628.14 at 19:00 UTC to $595.43 by 19:30 UTC.
Here, analysts cited low trading volume and a highly speculative market when explaining this sharp drop, asserting that a single large transaction was likely to have helped fuel this decline.
Petar Zivkovkski, director of operations for bitcoin trading platform WhaleClub, for instance, believes the sell-off was likely the result of one player.
He told CoinDesk:
"The current market environment is illiquid, making price susceptible to larger players with larger firepower. In this case, a few hundred BTC sold triggered a sell-off amplified by the use of high leverage by individual players."
His assertion that traders harnessed substantial leverage is backed up by Whaleclub data, which reveals that 76% of positions were long on 11th September and confidence, the percentage by which a particular day’s position sizes were larger than average, reached 75%.
Complicating matters is that when there are many speculative bets on an asset like bitcoin, these wagers can turn a modest price movement into a larger fluctuation, triggering either a short squeeze or a long squeeze.
Rise above $600
A good example of how low liquidity and substantial speculation can fuel notable price movements is bitcoin’s climb above $600 on 4th September.
After opening 2nd September at $571.68, the digital currency rose more than 7% over the course of three sessions to reach $612.39 on 4th September, CoinDesk USD Bitcoin Price Index (BPI) figures reveal.
The digital currency enjoyed this climb as low trading volume made the market susceptible to large transactions.
Once the market experienced this vulnerability, all it took was one purchase of less than 600 BTC to move bitcoin prices higher, said Zivkovski.
The resulting upward climb combined with the highly leveraged market to trigger a short squeeze, he added. Many speculative wagers were in place since market participants had been placing them during weeks of range-bound trading. Between 2nd and 4th September, 86% of speculative position size was long, Whaleclub figures reveal. Confidence had a mean value of 85% between 2nd and 4th September.
BTC VIX, an admin at a popular bitcoin trading club, provided further detail on how low price volatility can make the markets more vulnerable to single traders.
"When we consolidate for long periods in a tight price range, it is quite easy for larger players to calculate where liquidations will occur," he told CoinDesk. "When they get to those price levels the liquidations come in batches."
When liquidation orders hit the books, he said, larger players can close their positions. "Then it is just rinse and repeat.”
Cryptocurrency investment fund manager Jacob Eliosoff also professed his belief that a single buyer helped cause the notable price movement, as did investor and entrepreneur Vinny Lingham.
Lingham told CoinDesk he believes that a single buyer likely made use of low liquidity and a highly leveraged market to fuel a notable price increase.
As for whether this is a cause for concern about the market is uncertain.
Over the last several years, bitcoin has reached several milestones, as it enjoyed rising adoption as a payment method, regulators began assessing its merits and bitcoin's price has followed a steady, upward trend.
However, the digital currency has run into some challenges lately as low liquidity and substantial speculation have created a perfect environment for sharp price gyrations.
While bitcoin's volatility provides opportunities for traders, it can make the digital currency less credible in the eyes of market participants.
If bitcoin’s user base keeps expanding, this development might help bolster trading volume and make the currency’s price less dependent on speculation. Together, these improvements would make bitcoin prices less susceptible to the impact of major transactions.
For now, however, buyers should continue to remain cautious.
Whale image via Shutterstock