BTC has been quite the roller coaster lately -- just like old times! What’s causing all the BTC volatility lately? Also just like old times, I think it’s a combo of news, SPY correlation, and “weird liquidation effects,” but with a bit of a modern twist. 
First, the news. There’s been a lot of big events recently which BTC (and the broader market, but notably BTC) has reacted strongly to in one direction or the other. This is a real throwback to 2017 -- it hasn’t felt like news impacts BTC much lately.
BitMEX KYC, OKEx hack caused BTC to go down, Paypal, the Singapore bank, and general “institutiuonal adoption” caused it to go up. Mostly these were predictable and happened over a short time period, and mostly BTC reverted a bit from each of them over the next hours or days.
So, all these big events caused some volatility, which makes sense -- if you accept that they’re actually important, then they ought to! In particular, all the positive news (and a sort of decaying out of the negative news) caused the runup through the 28th, at least in part.
What caused the downturn afterward? Probably a bit of post-news reversion -- the general wisdom in crypto of “buy the news, sell the event” or whatever tends to be fairly good. But note that BTC started falling exactly when the broader financial markets did.
Indeed, recently the markets have again been falling due to COVID (likely because of especially Europe’s second wave of intense lockdowns, and a general sense that things are gonna keep sucking worldwide). Take a look at the graph of SPY from recently.
You can line the downturn in BTC from last night up with the one in SPY from yesterday’s trading day (note that the graph skips over periods when the U.S. markets are closed). But one thing does not line up -- BTC was down WAY more than SPY. What gives?
Indeed, BTC was down about 8% and SPY was only down about 4%. I don’t *know* why this is true, and I do think it’s explained *a bit* (50bp, maybe) by “news reversion,” but I don’t think that’s the whole story. I think a lot of the rest of the story is liquidations.
During this entire period, there were a *lot* of liquidations -- on BitMEX’s BTC perps, of course (god forbid they get excluded), but also elsewhere. Every time SPY fell, our office’s audio alerts indicating a liquidation would go off soon afterward (it's the sound of thunder).
Why is this effect more intense now than it has been? Well, the SPY move itself *was* fairly large, and given the nature of the high leverage these platforms allow you’d expect a lot of liquidations. But 2x the impact really is a lot -- has something changed?
Yes, it turns out -- as now, even *more* liquidations are happening in the BTC perp book on Binance. Here’s one of Alameda’s graphs demonstrating how the open interest of that contract changed yesterday.
The OI went down by $50m! It wasn’t all from liquidations, but a ton of it was. Why are there so many liquidations on Binance now? This was not the case in the first few months Binance futures existed, so what changed?
Well, BitMEX lost a lot of customers recently due to their new policies -- and I bet a lot of them went to Binance. Those are the same customers who gave BitMEX their reputation as a house of liquidations, so it’s no surprise they’re exhibiting similar behavior elsewhere.
And BitMEX’s order books and other users have kind of “adjusted” for all the liquidations -- smart traders try to provide to errant liquidation prints, increasing order book thickness over time, and making the overall price impact lower. Binance hasn’t adjusted yet.
And so, their liquidations are having tons of impact! And we can maybe expect that to keep up, which, if it happens, will short-term contribute tons of momentum to BTC’s price. Counting on this effect is risky (people might start providing more, etc.), but it’s worth monitoring!
(Note: other platforms and products have seen similar changes in liquidation behavior, but none so extreme -- presumably the BitMEX customers spread out, as you can see from looking at upticks in volume on Huobi/FTX/etc., but Binance’s order books were set up for this result.)
So, that’s my take on what’s going on with BTC lately (and with the whole crypto market, which has a beta to BTC all the time). Will it keep up? We’ll see! Market conditions change very fast these days, and I’ll be on the lookout to see how they change next.
Embarrassing typo.
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