Over the past few days crypto market corrected about 20%+ across the board. Bitcoin price volatility is the most common occurence in the crypto marketplace. Don’t forget that this is an early stage of a long-term bull market and there will be several 20-30% corrections along the way. If you had experienced the bear market of 2018-2020, then make sure to ride this bull!.

Reasons of bitcoin price volatility

So, why was there a correction and how correction got initiated and who supported it from continuing to fall further? Can this volatility lead to Blockchain Technology failure? Let’s try to understand the psychology of buyers & sellers.

One way to interpret: there has been a massive deleveraging to the tune of $6 billion in positions, most of which were “long”, and that contributed sell pressure to a market that was already a bit vulnerable due to it being “overextended”. The market had a huge run up in the past 3 months. After intense bullishness a slight correction was needed, and short-term traders were able to push price down to just below $43k before a larger force put up bids which caused shorters to slam on the brakes. This was by no means a shift in the long-term uptrend, but rather, a pause. In fact, it looks like the bottom of the correction is in.

Crypto market ecosystem

So who is putting up the money? Why bitcoin price volatility?

… who is putting up the money?

The U.S. institutions. They continued to bid strongly on the market and absorb any weak-handed selling. This is a huge narrative: that U.S. institutions are organically propping up the market right now, as they scoop up boatloads of Bitcoin to add to their treasuries and on behalf of their clients.

Markets expand and contract based on the overall “sentiment” or emotion of any given market’s participants. When a market gets too excited they become prone to a correction down, and when they get too pessimistic, they are prone to a correction up.

One helpful way of measuring this emotion of the market is to look at funding rates of perpetual swap contracts.

Funding rates are the cost to use leverage on a perpetual swap (i.e. cost of borrowing margin). When funding rates are positive, longs pay shorts to keep their position open. When funding is negative, shorts pay longs to keep their position open. Really hot rates could provide headwinds for any new long positions, and really cheap rates could provide a nice tailwind for any new long positions.

Looking from another lense, abnormally high rates could provide a good sell signal because….

…abnormally high rates could provide a good sell signal because. it signals excessive buyside leverage in the market, thus the long side is vulnerable to a squeeze.

On the other hand, abnormally low rates could provide a good buy signal because it could mean there are a lot of overly confident shorts willing to pay a premium to stay open, thus the short side is vulnerable to a squeeze.

You can also see extreme greed and fear by looking at the rate of change of price (i.e. momentum).

Very fast rate of change upwards = extreme greed (expansion up).

Very fast rate of change downwards = extreme fear (expansion down).

Declining momentum = attempt at equilibrium/fair value (contraction).

Last note: “extreme” is relative to the time frame that you are trading.

If you are a day trader, then you are looking for extremely deviant signals on the 5 minute or 1 hour chart, for example. If you are a long term trader, then you don’t need to look for signals on the lower time frame charts– that is just noise for you. Long term folks should stick to daily and weekly charts to find a signal that matters to you. Dive into the market dynamics deeper to make successful moves! Learn to take advantage of bitcoin price volatility!!

Recommended Reading

The Bitcoin Standard: The Decentralized Alternative to Central Banking

When a pseudonymous programmer introduced “a new electronic cash system that’s fully peer-to-peer, with no trusted third party” to a small online mailing list in 2008, very few paid attention. Ten years later, and against all odds, this upstart autonomous decentralized software offers an unstoppable and globally-accessible hard money alternative to modern central banks. The Bitcoin Standard analyzes the historical context to the rise of Bitcoin, the economic properties that have allowed it to grow quickly, and its likely economic, political, and social implications.

While Bitcoin is a new invention of the digital age, the problem it purports to solve is as old as human society itself: transferring value across time and space. Ammous takes the reader on an engaging journey through the history of technologies performing the functions of money, from primitive systems of trading limestones and seashells, to metals, coins, the gold standard, and modern government debt. Exploring what gave these technologies their monetary role, and how most lost it, provides the reader with a good idea of what makes for sound money, and sets the stage for an economic discussion of its consequences for individual and societal future-orientation, capital accumulation, trade, peace, culture, and art. Compellingly, Ammous shows that it is no coincidence that the loftiest achievements of humanity have come in societies enjoying the benefits of sound monetary regimes, nor is it coincidental that monetary collapse has usually accompanied civilizational collapse.

With this background in place, the book moves on to explain the operation of Bitcoin in a functional and intuitive way. Bitcoin is a decentralized, distributed piece of software that converts electricity and processing power into indisputably accurate records, thus allowing its users to utilize the Internet to perform the traditional functions of money without having to rely on, or trust, any authorities or infrastructure in the physical world. Bitcoin is thus best understood as the first successfully implemented form of digital cash and digital hard money. With an automated and perfectly predictable monetary policy, and the ability to perform final settlement of large sums across the world in a matter of minutes, Bitcoin’s real competitive edge might just be as a store of value and network for final settlement of large payments―a digital form of gold with a built-in settlement infrastructure.

Ammous’ firm grasp of the technological possibilities as well as the historical realities of monetary evolution provides for a fascinating exploration of the ramifications of voluntary free market money. As it challenges the most sacred of government monopolies, Bitcoin shifts the pendulum of sovereignty away from governments in favor of individuals, offering us the tantalizing possibility of a world where money is fully extricated from politics and unrestrained by borders.

The final chapter of the book explores some of the most common questions surrounding Bitcoin: Is Bitcoin mining a waste of energy? Is Bitcoin for criminals? Who controls Bitcoin, and can they change it if they please? How can Bitcoin be killed? And what to make of all the thousands of Bitcoin knock-offs, and the many supposed applications of Bitcoin’s ‘block chain technology’? The Bitcoin Standard is the essential resource for a clear understanding of the rise of the Internet’s decentralized, apolitical, free-market alternative to national central banks.

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