Bitcoin: The Pump before the Dump

Bitcoin’s counter-intuitive rally is making monkeys out of many would-be price forecasters. I can’t think of a single analyst who predicted the sudden strength.

Mind you, in todays opaque and complex data visibility, it’s hard to see a lot of the action several layers below the public feed. By that I mean we cannot be privvy to the schemes and strategies of nefarious players who might be using their capital to generate a response in the market.

For example, the biggest risk to the leading crypto asset after the implosion of an FTX is the implied future liquidation of bitcoin that should result from settlements of lawsuits as parties and counter-parties sue one another with gusto in the wreckage-strewn corporate battlefield. So while there is an expectation that there will be the equivalent of “power-of-sale” liquidations occurring that typically see prices discounted to foster expediency, there appears to be greater forces at work on the buy side sufficient to offset such trepidation.

So when the market moves against what might be considered the logical direction, one might start to develop a degree of FOMO, which might then lead to a case of indiscriminate buying. This is a strategic trap set by short strategists who know there are no fundamental reasons for an asset price to continue rising. Going long to go short is not a new phenomenon…its just one that is mostly lost on financial media, and so receives scant coverage.

In the age of the youthful and highly impressionable social media investor, rumours repeated by obscure “influencers” are amplified into buying stampedes for no fundamentally sound reason, as we saw with the Wall Street Bets events that lifted Gamestop stock to utterly unsupportable (by fundamentals) heights.

Bitcoin trading volume is mostly fraudulent

I would argue the same mindless speculation is what drove Bitcoin to $70k in the first place. Bitwise, a crypto asset manager based in San Francisco reported in a white paper submitted to the SEC in 2019 that  “roughly 95% of reported trading volume in bitcoin is fake or non-economic in nature and show why fake volume does not influence price discovery in the real bitcoin spot market.”

Obviously, there is more buying than selling happening right now. But the most plausible cause is the convergence of two new realities in the 2023 cryptoverse: active large players are fewer than during the pre-FTX collapse feeding frenzy, and available Bitcoin for trading on exchanges is far lower as spooked traders pull their holdings from exchanges to avoid FTX-like rug pulls.

But there are times in capital markets when stocks run higher for no apparent reason. The emphasis here is on apparent reason. There is never no reason.

At the most basic, a stock – or any asset traded on a marketplace – runs higher when there are more buyers than sellers. Most often, a breakout in a share price on no news or obvious macro catalyst can happen if somebody on the buy side knows something that everyone else does not.

Sidestepping the issue of the degree of insider information this might bear, the only other reason an asset price runs wildly higher without obvious catalysts is because there is a buyer who is trying to induce other buyers to jump in by triggering the FOMO mentality, formerly better known as “herd instinct”.

Bitcoin has been the beneficiary of at least one other market manipulation of this flavour; during the run-up in Bitcoin price from $15k to $20k, it is alleged that over 50% of the volume was settled  in Tether, which is/was ostensibly tied to USD by having USD1$ for each Tether, and has been shown by the Attorney General of New York to be a dubious proposition at best.

Bitcoin price flight is the pump before the dump

So knowing what we know about the nature of Bitcoin trading volume, and knowing that there is a very healthy portion of the crypto population that can be safely described as “bad actors”,  there is good reason to suspect that the current price strength is the result of a well capitalized group of short strategists pumping the price higher in anticipation of a blow-off that will lock in profit all the way down for them when they switch from the long pump to the short dump.

Here are the principle fundamental factors that point to a price retreat based on perceived risk:

1. The White House published an advisory titled “The Administration’s Roadmap to Mitigate Cryptocurrencies’ Risks” on January 27, 2023, which made it clear the        dawn of intense crypto oversight is imminent. While some crypto disciples proclaim this as proof of Bitcoin’s imminent ascendance into mainstream use, it is more likely that the new regulations will restrict its use as a “currency” and limit its utility to a mechanism for barter. In any other asset market, increased regulation would have catalyzed a sell-off.
2. January saw modest inflows of capital into the crypto space on the ETF side. According to Bloomberg, the total capital allocated as $210 million in January, which it touts as “the most since May” (2022). That is not a lot of capital relative to the market cap of Bitcoin which at time of writing is US$445.7 billion. So the idea that there is a broad resumption of interest in Bitcoin is something of a mainstream financial media canard today.
3. The short interest in Bitcoin futures has ratcheted up significantly in January according to data provided by the Commodity Futures Trading Commission (CFTC). The chart below tells paints the picture;

So while the irrational exuberance/FOMO factor dominates the chart at the present moment, there is very little chance this is not just a setup by the black hats to transfer unwitting players’ wealth over to them. It’s not a matter of “if” but “when”.

Original article: Bitcoin: The Pump before the Dump

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