The Breakdown - Why Bitcoin Just Flash Crashed

Episode Date: August 18, 2023

Was it SpaceX news? Evergrande bankruptcy? Macro Fed minutes? Or just good ol' fashioned leverage? NLW explores Thursday's crypto flash crash and what it says about where we are in the cycle. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Bingo, Bango, Bongo, to me, that is the real story. The utter lack of liquidity, a growing amount of leverage, peak market boredom, and this is just the type of stuff that happens sometimes. 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. What's going on, guys? It is Friday, August 18th, and today we are talking about the massive crypto crash. Before we get into that, however, if you are enjoying,

the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to get deeper into the conversation, come join us on the Breakers Discord. You can find a link of the show notes or go to bit.ly slash breakdown pod. Hello, friends, happy Friday. Yesterday I shared a meme with my wife. It was a tweet that read, Hi, I have a question about toddlers and my question is, what the fuck? Now, we are doing a little end of summer trip with the four and the two-year-old before the four-year-old heads off to kindergarten, so it struck the old funny bone. It was also exactly how I felt when I checked the markets yesterday after about three hours of being away from my phone to discover that they had completely nuked. So friends, now you get to play ketchup

alongside me because I have a question about markets and my question is what the fuck. This week's price action began much the same as it has throughout the past month. Bitcoin was painfully rangebound with basically zero volatility and muted volume. In fact, since the last week of July, Bitcoin has been stuck between 29,000 and 30,000, spending only a few hours marginally outside of that range. On Wednesday night, price began trending down, drifting below 29,000. Bitcoin hit 28,000 just before midday on Thursday, a move that would have been significant by itself. In fact, Bitcoin lost 4% over the course of Thursday morning, including a 1.6% drawdown in 1 hour at 11 a.m. This was the lowest level that Bitcoin had traded at since the bullish catalyst

of the BlackRock ETF application in early June. Then at around 5.40 p.m., Bitcoin flash crashed. In less than 10 minutes, the price plummeted by more than 9%. Bitcoin hit 25,000 on Binance and plunged slightly lower on BitFinex. Overall, over the course of two days, Bitcoin lost a pretty serious 14% before finding a bottom. This made it the largest 48-hour drawdown since the FTX collapsed last November. Ethereum fared no better, recording a 15% drop from its previous 1850 level to hit $1,50 on Binance. Now, prices for both assets did recover marginally into the evening, with Bitcoin

recovering to around 26,500, and Ethereum changing hands at 1680. Now, the level again decayed overnight, speaking to a continuing lack of confidence. Now, as you guys know, whenever we look at price action, there is always some highly indiscernible combination of narrative catalysts, plus post hoc narrative rationalization, plus news event catalysts, plus conversation, with usually a big dose of market structure thrown in. And so as we look into what, quote, unquote, cause this, let's keep all of those caveats in mind. Let's start, however, with market structure. Yesterday, Check Beatty from GlassNode wrote, newsletter released two weeks ago, quote, Bitcoin Options markets have priced the lowest implied volatility in history, with put options in

particular seeing the lightest demand. Given the context of Bitcoin's infamous volatility, is a new era of Bitcoin price stability upon us, or is volatility mispriced? Narrator, it turns out, volatility was mispriced. Maybe a little bit more crisply on market structure, Byzantine General wrote, Holy motherfucking shit, we just had the biggest liquidation day since the FTX blow up. So, according to coin glass data, positions worth over a billion dollars were liquidated on Thursday across all major assets. Bitcoin traders alone came just shy of recording $500 million in liquidations, and more than 90% of them were on the long side during the price

collapse. All told, Thursday was the largest single day of liquidations since June of last year. OKX saw the largest portion of liquidations among exchanges, recording over 30% of the leverage wipeout. Indeed, some suggest there were individual concentrated positions being targeted on the Asia-focused exchange. Ficky Tott wrote, after studying a bit, I think someone got hunted on OKX. All the OI was building disproportionately on majors on OKX over the past few days, and PURPS on OX wicked the lowest out of all the major exchanges. Now, open interest had been slowly ramping for weeks as volatility remained low. That means that more traders were piling into leverage positions during the summer doldrums. The most recent commitment of the traders report showed a short bias among institutions.

The report digested position data from the last week among hedge funds and commodity trading advisors and showed that bearish bets had been increasing in the CME-listed Bitcoin futures market, with two-thirds of market participants position short. But the question is, of course, was that all there was to it? Was this just an example of market structure running rampant? Specifically, is there a possible macro interpretation? What's certainly true is that crypto markets weren't the only ones to see turmoil on Thursday. During the day, global bond yields continued to rise with multiple tenors reaching long-term high.

The U.S. 30-year bond reached its highest point since 2011, hitting an implied yield of 4.42%. The U.S. 10-year yield moved above 4.3% matching its October 2022 peak, which hadn't been seen since 2007. UK and German yields have also accelerated this week. Also on Wednesday, the Federal Reserve had released its minutes from the July FOMC meeting. While the July rate decision was an entirely expected 25-bases point hike, there was remaining speculation around how hawkish the committee was on the need for continued rate hikes. Fed Chair Jerome Powell had been extremely non-committal in the post-meeting press conference, saying little other than repeating a commitment to data dependency. The meeting minutes, however, confirmed that officials were concerned that the inflation fight could be far from over,

stating that there was a potential need for higher rates. Coupled that with a recent resurgence in the housing market and continued resilience in the labor market were cited as risk factors that could drive inflation higher. The most recent projections from the Atlanta Fed have shown GDP on track to increase by 5.8% in quarter three, which is, of course, much too hot to be consistent with cooling inflation if growth continues at this pace. Given that, markets are now pricing in a much higher chance of an additional rate hike later this year, although the majority of positioning is still betting that the Fed is done with this hiking cycle. Capturing a lot of the sentiment I saw yesterday, Frog Capital wrote, The Fed minutes are kind of terrifying. The clowns admit that they are hurting

businesses and low-income families in particular, but hiked anyway. Then they want the big banks to, quote, establish readiness to use Federal Reserve liquidity facilities. They're prepping for disaster. On the back of this fairly hawkish set of Fed Minutes and another like higher for long-term yields, both major U.S. stock indices fell yesterday afternoon. The NASDAQ declined by 1.17% for the day, while the S&P 500 lost 0.77% on its second consecutive red day. Louis Harland of DeCentral Park Capital said, U.S. interest rates are rising to multi-year highs. This is bearish risk assets in general. If this sell-off and bonds continues, we could see negative price action in risk.

assets into the weekend. Noelle Atchison also put this in the context of the Bitcoin and crypto markets. She wrote, high yields are also bad for gold and Bitcoin because, well, they don't have any. And there's growing likelihood that something will break because rising yields puts strain on banks, pension funds, emerging markets with dollar debt, corporates needing to raise, etc. Okay, so we've discussed market structure, we've discussed macro, but what about news explanations? Candidly, usually this factor isn't really a factor. But in this case, it feels at least a little more plausible. There were at least two major news events that splashed across screens just as the market began to crash, both of which could reasonably be expected to impact

Bitcoin and broader crypto markets in one direction or another. The first was the Wall Street Journal published an article entitled A Rare Look into the Finances of Elon Musk's Secretive SpaceX. The headline was picked up by news aggregators as Elon Musk's SpaceX sold all of its $373 million worth of Bitcoin. Now, of course, reading that, it's pretty easy to understand why that headline might have caused rapid selling from bots. Turns out, however, that the re-reported headline was pretty misleading. What the article actually explained was that SpaceX had, quote, wrote down the value of Bitcoin it owns by a total of 373 million last year and in 2021, and has sold the cryptocurrency. In fact, the status of SpaceX's Bitcoin holdings were not the main focus of

the article, and that single sentence on them is ambiguous at best. It could mean that SpaceX has sold all of its Bitcoin at some point over the last few years, or that it had sold a portion like its sister company Tesla. What it definitely didn't mean was that SpaceX had recently dumped $373 million worth of Bitcoin onto the market, which is, of course, how the Twitter news aggregators had made it seem. The $373 million referred to the balance sheet write down rather than the amount of actual selling. Now, the second major news item that broke as the market collapsed was that Chinese property giant Evergrand Group had filed for bankruptcy in New York. Now, this news is not in itself particularly surprising. Just go listen to yesterday's episode about a primer on the Chinese economy.

Indeed, this bankruptcy filing is simply to ensure that restructuring efforts that are already ongoing in multiple jurisdictions are recognized in the U.S. Evergrand had first defaulted on its corporate bonds back in December 2021 and announced an offshore debt restructuring program in March of this year. Trading of Evergrand's shares have been suspended for almost 18 months. Still, the headline that a major Chinese property firm was filing for bankruptcy was likely enough to push news trading algorithms to sell off, even if the underlying news is something of a nothing burger.

There are also a number of accounts trying to equate Evergrand once again with Tether's but I can't imagine that that had a meaningful impact on price action, and since that's the subject of the show, we will just move on. Interestingly then, there was a flip based on another news event. Shortly after the price plunge, Bloomberg published an article entitled, SEC set to greenlight ether futures ETFs and win for crypto industry. So what's going on is that over the past few weeks, the SEC has seen a deluge of applications for ETH futures ETFs from almost a dozen fund managers. Until now, the SEC has always prematurely asked for applications to be withdrawn without consideration, so the fact that applications are still ongoing is a majorly optimistic sign.

The big concern had always been that ETH futures were an underdeveloped market that couldn't support an ETF, but that market is now as large as the Bitcoin futures market was when those ETFs were approved in late 2021. The article itself updated the story with anonymously sourced comments which claimed the SEC is unlikely to block the ETH ETFs from launch. They suggest the products could begin trading by October. While this was broadly the position of ETF analysts already, the news was a clear bullish catalyst for ETH.

The collapse price was entirely filled in on the news rising back up to $1,700. Still, although the news was enough to cover the gap down, ETH remained at a lower level than it began the day on, losing 6% from Thursday morning. Now, as an aside, there is some disagreement about whether it's good or bad. Les Moscovese wrote, CME Bitcoin Futures Futures Mark the 2018 top. Bitcoin Futures ETF marked the 2021 top. Most shitcoin-Purps listing on FTX marked their tops.

Please, educate me how Ether Futures ETF is bullish for Ether. Now, one piece of news that wasn't announced is the Grayscale ruling failing to materialize. You'll remember that Grayscale sued the SEC late last year, claiming that its refusal to approve conversion of GBT into an ETF was, quote, arbitrary and capricious. Bloomberg analysts noted that the average time for a court decision to be published is 150 days after oral arguments, which would be this week for the Grayscale case. There was significant anticipation that the verdict would be released on Tuesday's batch of decisions, and indeed that was even listed as a notational deadline in Bloomberg analysis,

alongside SEC decision deadlines for other spot Bitcoin ATFs. When the order was not published, speculation shifted to today, Friday, as the anticipated date. The grayscale decision is widely anticipated to go against the SEC, paving the way for approval of spot Bitcoin ETFs. This would undoubtedly be bullish for Bitcoin, so it's reasonable to assume that many traders were positioning for the verdict to be released. Unfortunately, there is no actual deadline for a court order to be written. They are released when the judge is ready and not a moment earlier.

It's totally reasonable to think then that some amount of the open interest, that got blown up on Thursday, was built around a thesis that the Grayscale Order would be coming this week. Now, whether or not the Grayscale Order is released today, and I'm recording in the morning around 10 a.m., the Grayscale team announced on Thursday that it was hiring in its ETF team, so they at least seemed confident about the eventual result. Finally, one story that no one was really pointing to, but which might have been important. Early on Thursday morning, news broke of a major raid in Singapore. A press release on Wednesday stated that Singaporean police had arrested 10 foreign nationals on suspicion of money laundering. Most of the arrested suspects possessed

Chinese passports. Assets worth more than 1 billion Singaporean dollars were seized, including cash, gold bars, more than 270 jewelry items, and more than 120 electronic devices. More than 35 bank accounts were frozen, accounting for $81 million, while 94 properties and 50 vehicles with an estimated value of 815 million were targeted for seizure. The raid was conducted on Tuesday by over 400 Singaporean police across multiple properties simultaneously, and buried in the gigantic list of seized property was the note that, quote, 11 documents related to virtual assets were seized. It's unclear at this stage what exactly that statement means and how much value the digital assets represent, but it does potentially represent a connection between an actual factual

money laundering operation and the crypto space, even if a small one. Now, let's take a step back and ask if any of this was really catalytic or just post-hawk narrative construction. Agent Gapathy wrote, WSJ News Nothing Burger, dump, Bloomberg News Nothingburger, pump, liquidated both longs and shorts, What kind of market is this? To that, trader Freddie Reynolds responded, one with no liquidity. Bingo Bango, bongo, to me, that is the real story.

The utter lack of liquidity, a growing amount of leverage, peak market boredom, and this is just the type of stuff that happens sometimes. I think it's also reasonable to ask, was it really that bad? Adam Cochran wrote, If you adjust for the amount of liquidity left to the system and the lower coin price, then this was a huge blowup. Flushed a lot of leverage out of the system,

which is why I feel spot buys are probably decently safe here. Tony the Bull said, The last two times the Bitcoin 4H was this oversold, a 63% rally followed. Another 63% from here takes us to 45K. Credible Crypto said, literally took more liquidations than we got during the FTX collapse to flush us this low and couldn't even break HTF bullish market structure.

Bitcoin didn't go below 26,000 on most spot exchanges, went lower on perps and leverage products because of the liquidations. Right inside HTF demand now. Send it to new highs. I think ultimately, this felt like a big move because it was. It happened fast, it happened violently, and we've been lulled into late summer complacency. But it just doesn't strike me as any sort of big fundamental thing. Nothing about where it feels like in the cycle we are has changed. The directionality and

momentum of the industry hasn't changed. And so especially for the long-term hoddlers who aren't concerned day and day out about price moves, this is kind of just another thing to be excited and chatter about on Twitter as we wait for the inexorable march forward to continue. That's going to do it for today's episode. I appreciate you listening as always. Until next time, be safe and take care of each other. Peace.