The Breakdown - Why Bitcoin Crashed

Starting point is 00:00:00 We're talking about an asset that's going to move in certain ways in the short term based on an ever-setting change of stimuli that is evolving as the asset matures. But then we're also talking about fundamentals. And fundamentals with Bitcoin involve a huge number of things. They involve belief, conviction. They involve the number of people who have come into the space. Those forces shaped the long term of Bitcoin's market cycle and are ultimately the ones that matter more. However, that doesn't mean there's not going to be a lot of volatility along the way.

Starting point is 00:00:27 Welcome back to the breakdown with me. NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Monday, December 6th, and boy howdy, you know exactly what we are talking about today. Now, if you were like me, you went to bed on Friday night, not concerned about the markets at all, having a good holiday-themed weekend full of friends and family, and then woke up to horror and bloodshed and red all the way down. At around 1150 Eastern time on Friday night, Bitcoin started breaking down from around 52,000. It happened in three small liquidation

Starting point is 00:01:16 cascades, followed by a final flush that got all the way down to 42,000 on most exchanges, although on some exchanges it got down even lower. Now, there was a rapid fill back up to the 46,000 to 48,000 range, and Bitcoin is currently sitting at 49,000, but still, this was a major move. We're talking 17% in a couple of hours, down $10,000. And of course, people were watching this happen in real time. Dylan LeClair tweeted, Bitcoin just saw $100 million plus worth of long liquidations in a 10-minute time span. Haven't seen a move of that size happened that fast in three months. William Clemente followed up 285 million of Bitcoin Long's liquidations. in 30 minutes. When all was said and done, the wrecked data suggested that 401,725 traders were

Starting point is 00:02:07 liquidated for a total of about $2.53 billion. Now, that's obviously some serious action, although for some reminder context, here's a tweet from the market dog who writes, keep in mind, April was a $10 billion liquidation, and September was $3 billion in six hours. Now, others looked to different numbers to tell the story of what was happening. Larry Sirmack from the block tweeted, total open interest has gone down from 21.6 billion to 16.7 billion in about 30 minutes. This would mean that almost $5 billion of open interest evaporated. This tends to be a much better proxy for liquidations because exchanges are now massively limiting liquidations data. So what actually happened? Well, let's turn to the takes. Will Clemente again tweets

Starting point is 00:02:51 TLDR of what happened last night. Open interest being built up for weeks plus a regime of positive funding and low weakened liquidity, meaning thin order books, gave a perfect storm for a long liquidation cascade. These forced cells executed into thin books, thus the drawdown. Now, one of the reasons that I like doing market shows like this, where we really just look at some big move that happened, is that so much of my time on this podcast is spent on big picture macro stuff, narrative stuff. But when it comes to understanding how Bitcoin and crypto markets are moving at any given time, those are only one part of the story. The other part of the story is the particulars of market structure in this space. And every time one of these huge moves happens, it's a chance to

Starting point is 00:03:36 revisit some of the concepts and themes that we see over and over and over again. So Will, for example, is discussing that low weekend liquidity. It's not an accident that we often see these big moves on the weekend, late at night US time, over the holidays. Those thin order books mean that as liquidations start cascading and market participants become four sellers, there's not a lot of buyers with orders ready to go, so it pushes even lower. Now, there were some who also said there was another element of the low liquidity environment, which is that some meaningful part of the industry was down in Miami for Art Basel. Some people said the issue with this was that the whole thing read like a top signal. Cryptofungus tweeted seriously, though, it isn't the top until everyone travels to

Starting point is 00:04:16 luxury locations to flaunt riches and parade around their NFTs while bar girls hold up signs with their Twitter names. The bigger question was just if people were all out partying, did it mean that big traders weren't at their computers for this move? Now, of course, as we've come to expect, Sam Tribuco from Alameda got more into the details of what happened. He wrote one of his customary follow-up threads. The insane price swings of the past day merit a follow-up to this thread, as well as an updated interpretation of what's been going on in the markets more generally, a thread about inefficiency. All weeks since news of the Omicron variant got out, both the equities markets and crypto markets have been up and down, or rather down and up, as various bad pieces of info,

Starting point is 00:04:54 quote-unquote, about the variant tank the markets and then they recover in the days and hours afterward. A version of this happened again on Friday, too. Equities ended up net down a bit yet again, though, in my opinion, there wasn't an obvious COVID-related impetus this time, general sentiment has been bad, though, and crypto followed suit yet again. A few features of this move were important. The price of Bitcoin, for instance, was nearing in on a long-time local minimum. Sub-53,000 hadn't happened since early October the same day it crossed 50,000. It was late Friday, U.S., early weekend Asia, among the lowest liquidity times. These line up for our favorite effect. Liquidations cascades. Tons of levered longs have been

Starting point is 00:05:31 open in the past month. Nothing special just would always happen in crypto. In fact, the insane leverage is lower than it used to be, but the effect was still substantial. Part of the reason it was still substantial was the low liquidity. On various exchanges, Bitcoin got sub-30K for a moment. And that was because how little liquidity sits on the book during super-off hours. The initial liquidations were the same size as usual, but the bids they were getting market ordered into were thinner, causing more price impact and more liquidations, since the prices got really low in many cases, and these two effects feed off of each other. All this ended up meaning that open interest got really wiped out across the board.

Starting point is 00:06:06 Much of this was from liquidations. This past day has demonstrated that. that it's certainly not efficient yet. Circumstances can definitely line up to lead to specific products being way off, or for a few minutes, the entire market can be way off, where it should be as a result of for selling. This stuff should get eroded away over time and likely will if big firms are incentivized to keep entering the space. The point that Sam has made on almost every thread about liquidations is that the volatility and price action is caused at least in part by the leverage in the system. In other words, even when the market does want to move down, it generally doesn't want to move down as much as it does. It moves down as much as it does because of these

Starting point is 00:06:44 cascading liquidation effects. Effects, which as he points out, are super amplified in the context of low liquidity. NIDIG sponsors this podcast, and they are the go-to Bitcoin company for banks and credit unions as well as corporate treasuries, fintechs, and hedge funds. Learn more at nidig.com slash NLW. That's nydig.com slash NLW. Now, kind of echoing Tribucos thought that this was something that was playing off of a pattern that we'd seen for a few days before, I Am Nomad tweets, I think this is the important thing, guys. The move didn't start today three hours ago. The move was December 1st and buyer failing to set in. This is why some non-dumb bears are smug right now. And by the way, if you move the clock to when Nomad starts his sense of

Starting point is 00:07:38 when this move happened, Bitcoin actually went down more like 27% than 17%. Alex Kruger tweeted what happened in crypto, large selling volume trigger to liquidations cascade during low liquidity conditions, weekend night, crypto people partying in Art Basel. This cascade would not have been possible if traditional markets were not in extreme risk off mode. Have to say it out loud, bears were most definitively right, some notable ones out there. Direction from here, in my opinion, will continue to depend on equities, which is unclear. But for as long as funding remains, this negative odds of another sharp correction are very low. So you might be asking then, is this equity's connection? Interestingly, Bloomberg published a piece this morning called

Starting point is 00:08:19 Bitcoin's outsized drop versus ether may stem from MacroLink. The piece is pointing to a note from Sean Farrell, the head of digital asset research at FundStraat. And basically, the note makes the argument that Bitcoin has become much more of a macro asset attuned to macro markets and correlated with macro assets over the last year as compared to other cryptos. This sort of makes sense, the big driving argument for many of these institutions to get involved in the Bitcoin space was the digital gold store of value narrative. In short, the article is arguing that Bitcoin is more sensitive to the inflation protection trade, which means that Bitcoin's going to be more subject to impact from things that the Fed is doing or things that the Fed is saying. Of course,

Starting point is 00:09:01 underneath that, then, might be a question of what's actually going on. And Farrell, in that same note, kind of summed it up. He cited three events on Friday that correlated here, news of the Amicron variant, reaction to potential for an expedited Fed taper, an action in the derivatives market. So I think the relevant ones that we're looking at are Amicron and the Fed's expedited taper. Which brings us to another Bloomberg piece, Morgan Stanley sees Fed as greater threat to stocks than Amicron. The piece points out that analysts right now are trying to wrap their heads around what threats there are to markets, and many are coming to determine that the Fed removing support is a bigger deal than the new COVID variant. Brian Nick of New Veen, which is the investment arm of

Starting point is 00:09:40 TIAA, which has $1.3 trillion in assets under management, said, the major risk to our outlook remains a sudden tightening of financial conditions if central banks are forced to respond to inflation driven by an overly tight labor market. UBS Global Wealth Management said they, quote, expect a period of heightened volatility ahead as investors attempt to assess the risks from Omicron and the Fed based on insufficient and patchy data. This is a sort of rock and a hard place for the Fed, and it's the same story we've been discussing for months now.

Starting point is 00:10:09 There are countervailing forces pushing central banks in different directions. On the one hand, there's growing inflation, which suggests for needing a more hawkish policy, which the Fed seems to be pursuing in terms of an expedited taper of bond asset purchases and potentially raising rates before they otherwise expected to. On the other hand, there's the risk to markets from future shutdowns related to new variants of the virus. As soon as the Omicron News was released, remember, there were some countries like Israel that completely shut their borders almost immediately. Anytime you have borders shuttered or businesses with restricted hours or anything like that, it contributes to market instability. Giving breath to that this week was the Bank of Japan, which is reported to have said that

Starting point is 00:10:51 Omicron is a potential reason to keep COVID-era aid. As I've said before, I'm not sure which way this goes, but there's no doubt that this is going to be the central macro discussion in the months to come. So what happens to Bitcoin next in this phase? Let's bring it back to our little part of the world. Some think that the benefits of the dovish monetary policy environment are perhaps greater than we give credit for. Jan Wustonfield wrote, so far, Bitcoin has lived through a phase of continuous support of financial markets by central banks. If the Fed actually tapers, Bitcoin would also likely be in for a rough ride and would be negatively affected, no matter how strong the on-chain fundamentals are right now. This assessment basically sees Bitcoin as a risk-on asset for the growing part of the institutional world that's bought in. Risk-on assets benefit from cheap money, and that's what we've had for

Starting point is 00:11:40 the last year and a half. Then on the flip side, though, there is the fundamentals argument. Ryan Selkis from Masari said, everything that was true last week, inflation is here, bonds are worthless, Web3 will eat big tech, defy will eat Wall Street, NFTs will eat Hollywood and big gaming, is true today with less leverage. Have fun. I think both camps can be true. I think ultimately when we're discussing Bitcoin, when we're discussing market cycles even within Bitcoin, we're really talking about two very different things. We're talking about an asset that's going to move in certain ways in the short term based on an ever-setting change of stimuli that is evolving as the asset matures. But then we're also talking about fundamentals. And fundamentals with

Starting point is 00:12:17 Bitcoin involve a huge number of things. They involve belief, conviction. They involve the number of people who have come into the space. Those forces shaped the long term of Bitcoin's market cycle and are ultimately the ones that matter more. However, that doesn't mean there's not going to be a lot of volatility along the way. Anyways, I hope you guys were among the set who is kind of blissfully unaware and just waiting for things to come back without having to worry about liquidation or anything like that. Let me know what you think actually went down, what you think happens next. Join the Discord. The link is on my Twitter bio. Come hang out on Twitter at NLW anywhere.

Starting point is 00:12:49 Happy Monday, guys, and until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Why Bitcoin Crashed

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.