- Bitcoin’s price is up more than 12% since early June.
- Investors attributed the surge to news that BlackRock had applied for a spot Bitcoin ETF.
- However, the more likely cause of bitcoin’s movement is large buying by so-called bitcoin whales as liquidity remains low.
- Analysts say this is causing big price moves for the world’s leading digital currency.
Andrew Onufriyenko | moment | Getty Images
Bitcoin has surged this month — but not for reasons you might suspect.
The world’s largest digital currency is up more than 12% since early June. According to data from Coin Metrics, the price surpassed $30,000 on Wednesday, hitting its highest level since April 14.
Market participants attributed the jump to news that US wealth management giant BlackRock has applied for a spot Bitcoin exchange fund that tracks the market price of the underlying asset.
While that may be one reason, the outsized move can be attributed to another factor beyond the news flow of large institutions making moves to adopt Bitcoin or other digital assets.
The “market depth” of cryptocurrencies has been at a very low level this year. Market depth is the ability of a market to accommodate relatively large buy and sell orders. When market depth is shallow and large players place orders to buy or sell digital coins, prices can move sharply up or down, even if the orders are not that large.
Market depth is a measure of the liquidity of a market.
Bitcoin’s market depth has dropped by 20% since the beginning of this year, according to data company Kaiko. Bitcoin is one of the hardest-hit cryptocurrencies in terms of market depth, Kaiko said.
Bitcoin’s market depth is down about 20% year-to-date within a 1% range from the mid-price, according to data firm Kaiko.
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“Bitcoin’s recent rise in value is largely due to large trades in a less liquid market,” Jamie Sly, head of research at CCData, told CNBC via email.
“Our analysis of market orders over 5 BTC shows an aggressive surge in market buying, suggesting big players are looking to get exposure to digital assets.”
“When large orders are combined with thin inventory, the market is subject to more volatile movements,” Sly added.
This lack of liquidity is partly due to regulatory scrutiny of the crypto industry by US authorities. The Securities and Exchange Commission has sued major exchanges like Coinbase and Binance.
The low liquidity that characterized the crypto market throughout the year is also partly behind Bitcoin’s 80 percent year-to-date rally.
Another notable feature of the current crypto market is the low trading volumes on the exchanges.
According to crypto data site CoinGecko, the cryptocurrency’s daily trading volume is currently around $24 billion.
That’s a notable drop from the total bitcoin trading volume of more than $100 billion during the peak of the 2021 crypto rally, when bitcoin nearly surged to an all-time high of nearly $69,000.
Large crypto investors usually hope that an early price surge will be enough to lure retail investors back into the rally, ultimately driving Bitcoin and other digital coin prices higher. But that didn’t happen.
“What’s notable about this rally is that overall trading volume is at its lowest level in several years and we’re only seeing a slight increase, which even then is well below what we saw from January through March,” said Clara Medalie , director of research at Kaiko, told CNBC.
“I think trading volume and price volatility are two of the most telling indicators of crypto market activity. Both volatility and volumes are at multi-year lows and even a rapid price increase is not enough to attract traders.”
In the last bitcoin cycle, market momentum was largely driven by big institutional names, as investment banks from Morgan Stanley to Goldman Sachs set up trading desks to give their clients access to the digital currency.
However, it wasn’t until retailers took notice that the market really started to erupt – in early 2021, people were tempted by the phenomenon of NFTs, non-fungible tokens, and other more speculative bets.
Later that year, the cryptocurrency market experienced a seismic rally that saw the price of bitcoin soar to unprecedented levels. According to CoinGecko, trading volume surged from $21.2 billion at the start of 2020 to $105.4 billion on November 9, 2021, when Bitcoin hit its all-time high.
Today, trading volume is nowhere near what it was at the peak of the crypto boom in 2021.
“Any news, if it’s good, then the professional traders trade – otherwise they don’t trade,” Carol Alexander, a professor of finance at the University of Sussex, told CNBC.
“When good news comes out like the bitcoin ETF, they fire the guns up.”
BlackRock’s ETF filing was followed by similar moves by Invesco and WisdomTree, which also filed their respective Bitcoin-related products.
“Bitcoin and Ether are both manipulated in this way by professional traders. They don’t trade most of the time, just wait until there’s some good news,” Alexander said.
“Then they sell the top and it becomes a sideways market.”
In fact, Bitcoin has been range-bound this year, and attempts to break out significantly higher have been thwarted.
Alexander believes Bitcoin is likely to trade in a range between $25,000 and $30,000 for the remainder of the summer.
However, she expects the cryptocurrency to rally towards $50,000 towards the end of the year, citing attempts by larger market participants to prop up the market with large purchases triggering outsized moves.
“It is not a market for normal customers. He really isn’t,” she warned.
Vijay Ayyar, vice president of international markets at Indian crypto exchange CoinDCX, told CNBC that he suspects the recent surge in Bitcoin’s price is more likely to be driven by “long-term institutional buyers.”
Ayyar added that big funds and crypto-focused hedge funds are among the market participants driving the action.
“I don’t think this is that big of a retail push as retail has been pretty bogged down during the recent decline,” he said.
Several crypto industry insiders have expressed hope that the market is approaching a “bottom stage” where it can rally again.
The recent price action mirrors activity in 2018, when both the price and volume of Bitcoin were subdued for several months before starting to rise again the following year.
However, CCData’s Sly said it was “too early to tell if the worst is over for Bitcoin.”
“The recent surge of interest from traditional financial institutions such as Blackrock, Citadel and Fidelity is fueling renewed optimism in the market,” he said.
“Provided that the overall macroeconomic environment and stock markets remain supportive, it is possible that Bitcoin could maintain its current positive price trajectory.”
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