Over the past few days, many articles and general social media has been widely spreading the idea that Elon Musk is manipulating the market and crashing it.
It's all about liquidity
Everything that happens in the market is the result of supply, demand, retail fear & greed as well as the actions deployed by smart operators and liquidity providers otherwise known as market markers.
Reality is always nuanced but the premisses for how price needs to go up or down is always dictated, directly or indirectly, by the relationship between the agents stated above.
Liquidity available in the market is and must be engineered by market makers and other insiders to ensure, in theory, that there is an efficient price discovery where both buyers and sellers can find the middle ground between their bids and asks but also liquidity for bigger players is available which can be very hard at times.
However, this "efficient price discovery" comes at the cost of smart operators taking advantage of certain market cycles particularly during periods of low liquidity, low volatility or low trading activity volumes.
During times of low volatility which often is the byproduct of low volumes, we will see smart operators use all sort of 'tools' like campaigns to drive emotional reaction from the retail or equally emotional institutional money (not all institutional money is smart money).
These campaigns, often in the form of news or public announcements, are purposely designed to drive liquidity from A to B (where B is often themselves or their institutional customers). More often than not, these are completely fabricated news or narrative attachment by taking advantage of external events. The main purpose is to drive emotional response from the market and/or create a strawman that moves attention away from what is really going on.
The market doesn't crash because people sold. The market crash because insiders decided to mark the price down aggressively before everyone else and in the process triggering series of stops and liquidations events. Emotional investors will end up selling at lower price levels and filling waiting orders at lows. Now smart operators can push price high so they can confuse investor and force them to buy higher only to crash once again. This process is repeated over and over again not necessarily exactly in the same way but with a similar blueprint.
The role of Elon Musk in all of this was to be the strawman. I'm sure SEC will go after Elon because they have the existential need to show regulatory authority. The reality is that the crash was meant to happen no matter if Elon even jumped on SNL or went on a Twitter rant spreading FUD about Bitcoin.
Tesla & Bitcoin pic.twitter.com/YSswJmVZhP— Elon Musk (@elonmusk) May 12, 2021
Following this tweet. There was a series of many other interactions where Elon not only reveal a complete lack of understanding on a subject, that took many to study for years, but also went on to suggest he could fix Bitcoin. This of course sparked massive havoc on bitcoin twitter and a lot of entertaining and misleading content for writers to report on.
Above all, it was the perfect tool for market insiders to pick on and make Elon Musk the necessary "bad guy" to drive emotional blame on. His bitcoin environmental FUD tweets, the perfect event catalyst for what was pretty much meant to happen. If it was not Elon it would be something else like some China FUD or SEC investigations or TAX authority public communication... or all of the above. Oh! wait that happened too... what surprising timing. 😏
There are, however, clues that can be identified that give us (non-insiders) an idea of what might be going on during periods of price consolidation, what is the probable outcome before these events happen and before someone to be publicly blamed on.
Notice, probable is emphasised because that is how every single hypothesis should be treated as. The odds of an event happening in a certain expected way MUST be always treated as a probability because the market can stay irrational longer than we can stay liquid.
So what was going on?
The market was overly over-leveraged. We had a massive $24B total open interest in the derivatives markets and a massive year uptrend rally without any sort of meaningful correction.
Futures were trading at insane premiums, everyone was super bullish and taking Bitcoin collateralised USD loans to buy more Bitcoin or Austin Martins etc.
In this article, I will be using a mix of technicals involving Bitcoin price action and volumes as well as data coming from the futures markets, including FTX, Deribit, CME and BAKKT.
For a start Bitcoin price was pretty much trading in a typical Wyckoff distribution range disguised as an uptrend while showing some signs of weakness which I will discuss below.
Notice that the schematic above is just a blueprint for the overall idea of the distribution trading range. Bitcoin did have slightly different behaviour but most principles apply especially because of volume analysis and the observable confluence with a typical distribution kind of range. Furthermore, despite the fact we are seeing a distribution trading range, it doesn't necessarily imply that Bitcoin entered into a bear market.
During accumulation or distributions market phases, in which price more often than not develop into trading ranges, the price will move somewhat unexpectedly up and down inside a structured range most of the time. However, this one was oddly looking like an ascending triangle out of a wider complex structure.
By the end of April, we have one final price upthrust with a somewhat extended candle but that candle itself didn't produce any meaningful volume during the move and immediately after. Something was off but it also coincided with the Coinbase IPO. Effectively marking it as the local top.
During May, the price action (PA) behaved very oddly toward the local resistance range while showing no significant volume signatures.
During that period volume, in general, started showing a steady decline and was particularly noticeable when price rallied up. That is not normal behaviour and is a sign of weakness in a market that seems to be not interested in buying into the uptrend or leading Coinbase IPO euphoria anymore.
In the picture below, we will look at Coinbase's order-book liquidity distribution over time in the form of a heatmap during the trading range.
The first thing to notice is the several white clusters of orders above or below the price. They represent the intensity and size of available liquidity both on the bid or ask side of the market at a given point captured right before moving to the next candle.
One of the benefits of this kind of chart we saw try to interpret how market makers are allocating liquidity. This is never easy and some exchanges are hard to interpret than others. But we can prove that the "invisible hand" is present...
It's pretty noticeable that the upper side of the range always had constant orders always waiting to be filled (with market executed buy orders) while the market has slowly shown weakness in piercing through those levels.
At times similar liquidity reappeared on the lower side when the price started moving down. Those are market makers ensuring that price won't crash further to attract more "buy the dip" kind of buyers so liquidity can be distributed to them while the supply side isn't fully tested if there is strength in the market or not.
With several attempts to test the resistance levels at 58-60k it's notable that not only the magnitude of orders is immense but the trade volumes are also very weak.
There was no strong conviction to buy into those orders at the 60k range top.
In the chart bellow we look into the Perpetual Swap vs Spot price basis.
When swaps trading at a premium to spot it will show up in green and in red when trading at discount. This is relevant because it's leading information that will affect the perpetual swaps funding rates every 8h.
When funding rates are positive Long positions will have to pay Shorts and vice versa.
What is significant here is that. While at the top of the range funding rates KEPT HIGH. This is a sign of a market that is overly bullish.
Funding rates have been high for over a year while the demand coming from the spot market was very strong. Hover since we entered into an "altcoin" season in January, Bitcoin price started slowing down significantly with several pullbacks along the way while trading at the same levels frequently for days. YET perpetual swap - spot basis kept going high and so funding rates.
When funding keeps this high for long, it is only a question of time, the day of reckoning has come for those who hold newly or averaged up long positions at these levels.
The market need always to find some equilibrium despite its natural bullish expectations. Having funding rates always in green cannot go forever without consequences.
When funding rates are this green it also brings the interest of the short sellers and liquidity providers since now they can earn interest every 8 hours from funding and close positions once funding return back to the mean on small corrections.
FTX and Deribit Futures premiums
In the chart below, we can observe FTX and Deribit's % premium difference between the different settlement dates of Bitcoin Future contracts and Coinbase spot price.
At the peak leading into Coinbase IPO:
- December was trading at insane 26% and 21% for FTX and Deribit, respectively.
- September, 17% and 16%.
- June, 9% and 9%.
Effectively these premiums were way overextended for a long time. Anything that goes beyond the 10% starts getting pretty high even for contracts that are due to settle in a reasonable long time like December ones.
The top of the market was also confluent with the Coinbase IPO. What was interesting is that immediately after that last candle upthrust where premiums reached the ATH. We see immediately after, a minor divergence emerging and a major one after that first initial crash. These were red flags that something has changed with the market cycle.
Those divergences signal to me that BIG speculative long positions are being unwinded after premiums peaking and the spot market finally showing price action weakness caused by saturation on the demand side at these high price levels but also on the supply.
The market was extremely bullish and predominantly driven by spot demand. So those futures kept going high and speculators that thought that would be a good idea to buy contracts that are already trading at a huge premium to spot were basically setting themselves for reckoning.
Investors who took the opportunity to hedge and short these futures basically set themselves for an average of 20% extra reward in the eventuality market price crash and repricing of these futures contracts to natural lower premiums. That was exactly what happened.
Because premiums always trend in decline towards spot price as it reaches the settlement date. Those who didn't have any particular interest being long term holders or care about the direction of Bitcoin price but wanted to capture that extraordinary "risk-free" premium while being directionally neutral.
They could simply execute what is called a cash-n-carry trade which put sell pressure on Futures contracts and helps bring some equilibrium to the futures premiums. Investors simply buy bitcoin (spot) at local highs and short these futures to lock in the premium difference at the settlement date. This is done by closing contracts close or below spot price and sell their spot bitcoin independently if the price goes up or down. Investors may also see a chance to close that trade before the settlement date if the crash is significant to push all premiums briefly into or close to backwardation (trading bellow spot index price) where premium can be captured immediately instead of waiting for the natural settlement date.
Another aspect to take into consideration is the fact as the market now trend aggressively against long positions it will start a cascade of selling positions result of stops and liquidation events.
In a situation like this, it can cause a snowball in the market especially the cash-n-carry trades described above being unloaded into the spot market causing even more downside if they big enough and there no bids on the demand side to absorb all that sell pressure. It's a situation where sell/short pressure is seen on both spot and derivatives. This is what we see on the 15-19th of May with an aggressive decline in the futures premiums.
CME & BAKKT Futures
During the whole bull market, we barely saw any meaningful volume showing up on CME December contracts. All of a sudden significant volume upthrust show at the very top of the range. Flagging a potential local market top confluent with the Coinbase IPO event.
Here we see BAKKT in September contracts showing huge volumes while price moves weirdly up on barely any significant volume in spot markets. A huge disconnect and as such another red flag signalling potential of unwinding of long positions or simply short positions being placed for the same reasons described above.
The reason behind these unusual volumes might be related to the potential of:
- the unwinding of long speculative positions
- new heavy short positions to hedge long spot exposure
- directional naked short trades
- cash-n-carry trades
Overall CME and BAKKT had hidden clues of potential reversal signs and build of institutional hedge short positions that most people don't look for.
CME Commitment of Traders
The Commitment of Traders (COT) report is a snapshot taken every Tuesday of the open interest on CME and data is generally available by Friday. Likewise, there is a significant gap between the data OI is captured and reported to the public.
The best approach to look at this is not on a week by week but by the behaviour and sudden changes in the trend on any of the its categories and contextualise with everything else that we can observe happening the market.
Interpretation of the COT to be frank is hard and nuanced at times because we can assign different types of significance from its interpretation.
But here's the way I see it.
It's interesting that right at that last leg leading to the top we observer Dealers starting becoming buyers and immediately after Coinbase IPO event we saw significant drop in levered funds and large specs in out of their shorts but also asset managers and small professional speculators closing their longs.
More important than trying to rationalise what each line meant is more relevant to notice that there is a significant shift in the behaviour. That is the red flag that something has changed and something big could happen soon.
With all the data points presented above, we can deduct that the market was in distribution mode and getting ready to do some aggressive moves before any of Elon Musk's tweets.
The smart-money was efficiently unwinding their spot positions while opening short hedges and other sophisticated trades.
I do argue that the reason why Bitcoin kept going up on a slow steady full of pullbacks and declining volumes was due to the Coinbase IPO and the "Bitcoin to 300k euphoria" to give liquidity the opportunity to rotate into shitcoins 💩 and let it run for good 5-6months until them crash even harder with Bitcoin.
Once rotation was done and profits consummated by smart money. Bitcoin then could crash and drag everything else with it.
These market crashes are generally brutal and they take retail's money and in some cases lives but Elon Musk is really not really to be blamed. The market operators just found a sweet strawman so that all the attention could be focused on him.
At the end of the day what really will happen is people selling their Bitcoin to institutions and stronger hands waiting to get hands-on that cheap Bitcoin from the weak hands.