For crypto investors, the last week served as a reminder that bitcoin and market volatility still go hand in hand.
After tracking above $US8,000 ($11,680) for most of October, BTC prices suddenly slumped towards $US7,000 on Thursday.
That was followed by an even sharper bounce, as crypto prices surged on Friday (US time) to briefly climb back above $US10,000.
While identifying the causes of sharp moves in bitcoin prices is always an inexact science, many commentators pointed to comments from the Chinese government as a catalyst for the move higher.
Speaking on Thursday in Beijing, Chinese President Xi Jinping extolled the virtues of blockchain technology, describing it as an important breakthrough and calling for increased investment in the space.
For Adrian Przelozny, CEO of Australian crypto exchange Independent Reserve, the price action in the market appeared to have a “pretty direct correlation” with Xi’s comments.
“I think generally any news out of China — whether it’s good or bad — tends to have an outsized impact on crypto prices,” he told Stockhead.
And he noted that if anything, crypto news out of China had tended to lean towards the negative. Most notably, the country outlawed crypto trading back in 2017, a ban which remains in place today.
As it turned out, the ripple effect from Xi’s comments around blockchain wasn’t just limited to crypto.
Across the two mainland Chinese stock exchanges in Shanghai and Shenzhen, more than 60 tech stocks surged by 10 per cent, the intra-day limit.
According to Bloomberg, some were registered as blockchain companies while others reaffirmed their connection to the technology, to take advantage of the surge in demand.
China’s central bank is also in the process of rolling out a digital currency, which Przelozny said may give authorities the ability to exert greater controls of money flows within the economic system.
Market maturity still some time away
While the response to Beijing’s blockchain focus got plenty of attention, analysts have also pointed to the influence of new trading products on the crypto price action.
A notable player in that market is the BitMEX exchange, which runs from a head office in Hong Kong and is owned by a company registered in the Seychelles.
BitMEX offers futures contracts that allow traders to make crypto trades with more than 100x leverage.
Trading volumes on BitMEX spiked when BTC prices slumped on Thursday — a possible sign riskier trades can exacerbate price swings in a given direction.
“If prices move up, those short positions start to get liquidated; and that forced liquidation requires holders to buy crypto and repay their loans,” Przelozny said.
“The opposite happens when prices fall, so anyone who has a long position gets closed out.”
He said the dynamic goes someway to explaining the “snowball effect” in the recent price action.
While BitMEX ranks in the top three exchanges globally, its activity is restricted to largely Asian markets — residents of the US are banned from using the platform due to US Commodity Futures Trading Commission restrictions.
So like other nascent sectors such as cannabis, the crypto market still operates in a multi-speed regulatory environment depending on the jurisdiction.
But more broadly, Przelozny sees the introduction of new trading products as part of the “natural evolution” of the market.
“I think as we see more complex financial products being offered, the market will begin to mature,” he said.
“That volatility we’re seeing at the moment — it’s kind of a symptom of a market that’s still early on in its evolution. Once the full suite of products are made available, I think we’ll see overall volatility drop a little bit.”
For its part, Independent Reserve (IR) operates in the highly-regulated Australian market which restricts the numbers of coins available to trade.
In addition to offering insurance products, the exchange has also introduced an “Auto-Trader” feature that allows customers to dollar-cost average their crypto accumulation strategy.
For example, rather than buying $1,000 worth of BTC at once, they can make five weekly trades of $200 at pre-determined intervals.
While IR offers exposure to some smaller alt-coins on its platform, Przelozny said the majority of trades — “around 80 per cent” — are in BTC trading pairs.
“The rest is made up largely of Ethereum and to a lesser extent Ripple, then there’s a long tail, so I think the niche coins – they’re not really that highly traded,” he said.
So, what does the future hold? It’s never an easy question in this market, but Przelozny says chances are more price volatility is on the way.
He cited the bitcoin “halving” event scheduled for May 2020, when the block reward for new bitcoins mined will fall to 12.5 coins (from 25).
“There’s going to be more speculation, and I’d expect a pretty stormy trading period to be honest because that’s what usually happens around a halving event,” he said.
“It’s going to be the biggest thing in the crypto space, by far.”