Price volatility is one of the main reasons cryptocurrencies are under criticism across the world. At the end of May, HSBC, Europe’s largest investment bank, said it had no plans to offer digital coins as an investment because they are “too volatile”.
Nothing unites opponents of cryptocurrency like its volatility. But some analysts have observed an unusual trend: Cryptocurrency crashes tend to occur on weekends.
It is on Saturdays and Sundays, when most asset classes are in vacation mode, that crypto volatility increases.
This phenomenon has been observed in the crypto market for several years now, Stephen McKeon, finance professor and partner at Collab + Currency, a crypto-focused investment fund, told CNBC.
Liquidity requires a constant supply of buyers and sellers. If there are fewer buyers than sellers or vice versa, transactions become more difficult – a situation that results in a spike or crash.
“People still tout Bitcoin as 24/7 liquidity, 365 days a year, but that actually means you have periods of very thin liquidity,” Nic Carter, company partner, told Bloomberg. of Castle Island Ventures crypto-venture.
“If you want to deploy $ 500 million worth of Bitcoin, you will probably want to do so during bank core hours,” he added.
The 24/7 market operation has paved the way for price swings when you least expect them. But is this really it? Let’s find out.
One of the reasons, according to Amin Shams, a professor at Ohio State University told CNBC, for the volatility over the weekend is “fewer trades.”
When transaction volumes are low, price fluctuations increase.
Market volumes rebound on Sunday night as Asian banks prepare to open, then U.S. banks follow suit, McKeon continued.
Then there are crypto influencers like Elon Musk, his one tweet sets off a whole wave of activity that lasts for weeks.
The Crypto market is made up of dozens of disconnected exchanges, which are in fact their own islands of liquidity. All of these platforms trade with their own policies due to the lack of a centralized, equity-like market structure.
“If you think about the structure that makes it conducive to things that are going to be very volatile and where you’re going to have big moves. It’s obviously going to be affected by when people trade, when people are awake, when people are watching the markets, ”Greg Bunn, chief strategy officer for CrossTower, told Bloomberg.
There are many reasons for describing this phenomenon. Some believe that since there are fewer market makers on the weekends, the market reacts by going up or down.
According to the efficient market hypothesis, the market should expect less liquidity on weekends, but “this is a feature of the market that has always been there and we expect it to be a feature of the market. which remains in the future ”. Teddy Fusaro of Bitwise Asset Management told Bloomberg.
Margin of negociation
A booming crypto loan adds to the volatility. Traders borrow from exchanges to buy more coins. When coins drop below a certain level, they have to pay off debt, an event called a margin call.
But imagine that traders cannot refund exchanges. The exchanges then sell the currency and get their money back.
These cases escalate on weekends as banks are closed during this time. Without money, traders find it difficult to repay borrowed funds, triggering a massive sell-off.
This brings the price down even further, Shams said.
Traders can also try to artificially manipulate the market for profit. “There are a lot of studies that show there is (market) manipulation,” Shams told CNBC. But we don’t know the extent of the manipulation.
Research from 2019 showed that Tether – a cryptocurrency coin linked to the US dollar – artificially inflated bitcoin and other cryptos during the crypto boom of 2017.
However, analysts have mixed opinions on this. “Personally, I haven’t seen any conclusive evidence to suggest manipulation,” McKeon added.