A Bet on Bitcoin is Gambling on the Whales

Key Takeaways

1. The price of Bitcoin has been suspiciously stable following the epic collapse of FTX less than 2 months ago
2. The whales are defending the Bitcoin price at $16,000 waiting for interest to flood back into Bitcoin
3. It’s hard to imagine a bigger hype train than 2021 which means Bitcoin may not make a new all-time high

An Artificial Market

The Bitcoin market has completely flat-lined since Nov. 9. This was directly after the FTX collapse, which I  wrote about back in November. In that analysis, I mentioned how I had been raising concerns before the collapse about how quiet the Bitcoin market had looked over the summer of 2022.

In the lead-up to the Three Arrows and Luna collapse, the Bitcoin market had been seeing major weakness from November 2021 up through May 2022, falling from $67k to $30k. This weakness actually helped perpetuate the collapse of Luna and Three Arrows.

The collapse in Luna and Three Arrows then caused the price of Bitcoin to drop below $20k. Looking like it could drop to $10k in short order. However, immediately following the drop below $20k, the market stabilized until the FTX collapse. That pushed the price down another 20% to the $16k region.

Since FTX collapsed, the market has gone even quieter. The price has been bouncing between a very tight range of 16.5k and 17.5k for almost two months now.

The chart below shows this price action compared to the S&P 500. While the S&P has continued to bounce around the last two months, Bitcoin has gone incredibly quiet. This seems extremely unlikely after such a major event unless interested parties are in the market defending the price.

Figure: 1 SPY vs BTC

One of the primary metrics used to evaluate price fluctuations is volatility. This is the standard deviation of the price, annualized. The chart below shows the volatility of the S&P and Bitcoin going back to early 2021.

As can be seen, the volatility in Bitcoin is consistently above the S&P 500 by a wide margin. Bitcoin tracked around 75% whereas the S&P was around 15%. It should be noted that the volatility lines below are actually correlated, as the S&P became more volatile so did Bitcoin. That remained true until the Fall of 2022.

The 30-day rolling volatility in Bitcoin plunged in October and actually dipped below the S&P volatility for a brief period on Oct. 24 . When FTX happened, volatility spiked, but it was very short-lived. On Dec 7th, the 30-day vol of Bitcoin was 77%. This plunged to 32% on Dec 12th as the trading period around FTX faded past 30 days. 30-day rolling Bitcoin volatility finished the year at 27%, dipping below the 28% low seen before the FTX spike.

Think about this! After each successive collapse, the market becomes more stable and less volatile. It’s not even seeing a price rebound as rumor/speculation becomes fact. You would expect either a price rebound if the bad news had been priced in or further selling if the market had not anticipated an event.

Figure: 2 SPY and BTC Volatility

This would be like the stock market flat-lining directly after the collapse of Lehman or the Covid lockdowns (the market actually saw massive turnarounds). One might argue that this is proof that Bitcoin is becoming more mature and cleaning out the deadwood. But this does not make sense because markets do not stabilize in the wake of such uncertainty. They become more volatile! This is especially true when surrounding markets also increase in volatility.

The chart below plots the difference between the S&P and Bitcoin volatility shown above. At the end of December, Bitcoin and the S&P volatility were separated by only 1,100 bps. Over the past 3 months,  as the S&P has become more volatile, Bitcoin has become less volatile. How is this possible? Especially in the wake of an epic exchange collapse, how does the price of Bitcoin just flat-line?

The answer:  the Bitcoin whales are supporting this market. They have put a floor around $16,000 and are defending that floor. Why? Because it is easier to defend a floor than drive the recovery after a big fall. If the price were to drop to $10k it would take more effort to get back to $16k than simply defending $16k. Furthermore, if the market looks stable, then holders will be less tempted to sell. If the market were to drop below support, it could create a cascading selling event, imploding the price of Bitcoin.

This is not just speculation either. A recent paper from the National Bureau of Economic Research found rampant market manipulation in the smaller and less regulated exchanges. Kitco provided a  good summary of the findings last week.

Figure: 3 Volatility/Standard Deviation

This drop is even more surprising around the holidays when Bitcoin typically picks up in volatility. In fact, Bitcoin just saw its least volatile December since 2012! The S&P however, just saw its most volatile December since 2018.

This does not make any sense. FTX collapse and a volatile stock market should be driving volatility higher in Bitcoin not lower. It is a flat market because the whales have their thumbs on the scale.

Figure: 4 December Volatility

The whale’s best bet is to stabilize the price and let the market consolidate at a high price point. They hope that if they can bide their time at a higher price point, it will be easier to blast the price higher once (if?) interest in Bitcoin returns.

Right now, the whales just want the market to go into hibernation at a high price point and consolidate there. It’s working too. The chart below shows the Google Trends for both Bitcoin and Ether. They are both at lows last seen in November 2020.

Figure: 5 Price and Volume

The chart below shows even more evidence of a market that is waning in interest. Trade volume has gone nearly straight down after peaking on November 23rd. 30-day average rolling volume is now at the lowest level since May, before the Luna blow-up, Three Arrows Collapse, and FTX collapse. We are less than 60 days from the FTX collapse and yet trade volume is simply evaporating.

Figure: 6 Price and Volume on Log Scale

Another dataset to consider is the Comex futures market. Bitcoin futures started trading in 2017. Open interest has actually stayed relatively flat since September 2022.

Figure: 7 Comex Open Interest

The flat open interest was in the face of futures trade volume plummeting in December to the lowest level since August 2021. The futures market is a reflection of institutional interest, and this market is also getting quiet.

Figure: 8 Comex Volume

The CFTC breaks down open interest into different categories in its Commitment of Traders (COT) reports. That report shows that the net position of longs has actually stayed relatively stable. The only change over the past several months came on the short side as Dealers took over some of the Lev money shorts positions.

Figure: 9 CFTC Net Long Short Contracts

While the Asset Manager position above looks relatively stable. the chart below shows the notional amount of open contracts. Looking at the two charts together shows that Asset Managers have sat in their positions and watched their position value collapse from $1.45B to $408M since October 2021. This represents a 72% fall in value in just over a year.

The Asset Managers have been crushed, yet they are still holding on. Another round of selling could cause the Asset Managers to finally throw in the towel and sell. Not only would this crush the price but it would nearly wipe out the Bitcoin futures market.

As of December, Asset Managers hold 93% of the net long position in Bitcoin. If they cut bait and run, the futures market will see open interest completely crash. This is another reason why the whales are defending the price so hard. If the institutions leave, they might not come back.

Figure: 10 CFTC Net Long Short Notional

Finally, we can look at the Grey Scale Bitcoin Trust (GBTC) premium/discount to gauge where market sentiment is at the moment. The current GBTC discount is approaching 50%. This means that you can buy Bitcoin at half the price if you use GBTC!

Figure: 11 GBTC Premium and Discount

The chart below uses the GBTC discount and premium to derive a market-implied price. The current market implied price is right around $9k. This is the lowest level since April 2020!

Figure: 12 GBTC Implied Price

What’s the point?

In the wake of the epic FTX collapse, the Bitcoin market has gone extremely quiet.  Way too quiet , especially given the volatility seen in the general stock market. The explanation is the whales defend the price.

If the whales let the price fall back below $10k, it would take a massive effort to reinflate the bubble. Think about how Bitcoin got to $60k. In 2021 you had:

• • The Fed pumping trillions of dollars
  • Every asset in the world surging in value
  • Non-stop coverage of Bitcoin across every media platform
  • The surge in the NFT market

Everything went right and the whales could ride the wave, unloading their Bitcoin on the new entrants. 2021 was peak Bitcoin though. How do you generate more hype than 2021 to sucker in any new investor? This is the problem the whales face, there won’t be another catalyst that will enable them to dump their Bitcoin on the next round of suckers.

True believers keep talking about Bitcoin winters and how they all eventually end with each summer brighter than the previous. It’s brighter because each summer has seen greater interest and hype. Unfortunately, if you were not a buyer in 2021, and you aren’t buying this dip… you probably won’t be buying in the future.

The whales are waiting for the winter to end, but it’s more likely this winter will never end for Bitcoin. Given the challenges ahead in 2023, it’s time for astute investors to convert digital nothing into hard currency. Physical supply shortages in precious metals  are a real thing , unlike the superficial supply constraint of Bitcoin.

I am in no way predicting an imminent collapse of Bitcoin. But the market is way too quiet. How much support can the whales offer? Are you willing to bet big on the whales continuing to defend the current $16k level?

Furthermore, the next Bitcoin catalyst will likely spark more selling. This could be another exchange collapse, or even something breaking the general stock market causing money to flee risk assets. If the $16,000-floor breaks, it could be a quick move down to $10k as the whales run out of firepower. This type of manipulation and dependence on a few big players does not exist in other markets. If you trust a few whales to protect your gamble on a digital token barely 10 years old, then so be it. Otherwise, consider something with a  much  longer track record and  far  more stable: buy some gold!

Data Source:  Tiingo ,  Coin Market Cap , and  the Block

Some of these views and charts can be accessed through the  Exploring Finance Portfolio Builder tool