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Cryptic ball: just a healthy flush.
Holy cow, what a Tuesday! This will be a long email but we recommend you read it until the end. It seems we were correct regarding volumes picking-up after Labour Day, uh? Indeed, we told you about the high probability that BTC would make a strong move soon, and that SOL's price action was a bit too hot given the unmet demand for NFTs (and also due to overloaded DEXs). But, naturally, we didn't expect total market cap to crash 21%, most of that in just 25 minutes!
Still, we were happy to hear from some readers that they managed to "ride out the storm quite well thanks to the newsletter", specifically to the "Earth, Wind & Fire" post, which warned about a possible 15% flash dump later in the month. We repeat what we said: we believe we're still in bullish mode (until proven otherwise), and major dips are normal in these times, as also experienced earlier this January. So one needs to manage their risk and ensure they can withstand the often volatility.
After all, SOL dumped 36% from Tuesday's ATH, achieved some hours before the crash. But is already up 33% from its bottom and at an higher level than Monday! To be fair, few coins had such a rapid bounce. And, until bitcoin recovers from the 19% dump it experienced, it's likely most traders will feel bearish and only select alts will provide good trading setups. But should you feel afraid? Read ahead to understand what happened and what do we expect for the next days!
Chart art: just a nice bounce.
Market musings: just a long squeeze.
The good thing about bitcoin is that you can have inside information and trade it without being prosecuted by the US SEC. This is especially convenient if you work on the SEC or one of its targets and know something we don't, right? While we agree with Alex Krüger when he says "sometimes there's no narrative" in reply to major newspapers claiming the crash was due to El Salvador's problematic Bitcoin wallet roll-out, we believe we have a good hypothesis that is also informative:
To begin, Galaxy Research reported that the crash was caused by a major whale offloading BTC during the morning, US timezone, through an OTC desk (which deals with with amounts larger than exchanges can handle). This move is also backed by exchanges data, which reports a sharp decline in basis (i.e. the difference in price between futures and spot markets), implying price first crashed on spot and only after dipped in the highly leveraged futures markets.
All this would have been fine if the OTC desk traded the large position over a couple of hours or days. But they clearly had orders to dump it. And the dump on the spot market soon triggered arbitrage bots across the board to catch up. As the market was getting warmer over the past weeks, the generalised sell-off soon triggered a liquidation cascade, caused by overleveraged longs being automatically closed. Note that ETH's open interest (i.e. the combined amount of positions open in futures markets) had just hit a new ATH since May 21st's crash!
Now, most of our readers should already be familiar with the volatility that leverage brings, which is higher the more euphoria is felt in a market (as more irrationally confident traders go wild with risky futures). But what's interesting is what caused the initial whale to dump it when the fundamentals were so strong now, right? Well, big players are always trying to move the market to their favour. And they typically take advantage of FUD to do so. What was the new FUD?
Now that everyone is fine with China's ban and with Tether's audits, something had to come up. And the latest FUD theme is regulation. Well, yesterday late night, US timezone again, Brian Armstrong tweeted that the US SEC was engaging in "really sketchy behaviour" and was threatening to sue without the typical engagement that regulators tend to provide. This is the CEO of the US's largest exchange and an hallmark in the crypto world (remember BTC's top was on April 21st, one week after Coinbase's IPO?). And those were strong words!
That's the kind of story that makes the cover of the Financial Times website. In other words, that's the kind of story that can rattle a market. Our hypothesis is that someone knew about this, shared this info with some whales, while they slowly flipped short on futures before temporarily dumping their spot holdings and profit millions from the trade. And while we typically don't engage in such kind of speculation here, in this case we believe this is actionable for you, traders. Why?
Because the flash crash rinsed the excess leverage from the system, which can allow the alt season to continue - more or less undisturbed - over the next months (provided the US Fed doesn't spook the stock market later this month, right?). Moreover, on-chain data indicates both short-term and long-term investors continued to buy after the dip. And SOL is just 10% away from a new ATH, after overcoming XRP's market cap. All-in-all, for now one should be mindful of a potential short-term peak in the NFT bubble and keep following bitcoin. If it doesn't reclaim $47k by the end of the week bears will wake up and try to push it down below $42k. That would be quite bad, but also unlikely - at least for now!
Visual block: just some commissions.
Three things: just some liquidations.
- Alameda's Sam Trabucco explains the liquidations cascade in simple terms. Curiously, he admits one of the world's top crypto trading firms wasn't expecting this move and so wasn't able to sell before hand. HODL!
- Arca's Jeff Dorman discusses the difference between fundamentals and potential among new crypto projects. Funnily, he tells the story of how an NFT-based game's community attacked his rational view on Twitter.
- Messari's Ryan Watkins analysis whether the speculation about smart contract platforms (i.e. Ethereum killers) is rational. He also shares an interesting take about forward-looking valuations and Ethereum's price history.