Reposting an article Avi Gilburt and I wrote for Seeking Alpha. That means Steemcleaners, I am not plagiarizing, just reposting here for followers.
When gold dropped from 2011-2016, we heard cries of how it was manipulated to drop from its all time highs, down to almost $1,000. Can we soon see the opposite occur in Bitcoin?
Bitcoin returned roughly 1700% in 2017. While this statistic is significant, we believe that 2017 marked the year of institutional entry into the asset class at a meaningful level. This will shape the trade in this asset far more in the long run, than the speculative spike in 2017 that has been significantly retraced.
What are the signs of institutional interest in crypto? The formation of Crypto Hedgefunds, the start of CBOE and CME futures, that allows large traders to hedge positions with regulatory oversight of clearing, and the rise of prime brokers like Cumberland Mining are just a few signs of institutional demand. The number of bitcoin based ETFs put in front of the SEC for approval also indicates the intent of some institutions to bring a wider audience into the asset class.
As the top became evident in January 2018, the start of futures trading at the CME became a target for blame for the top. Now, as this bear market lingers many are looking for institutions to bring the market back to its bullish ways.
Will this increased demand for crypto, and the possibility of investment by larger traders and funds bring a turn in the crypto market? This is a common hope for many crypto traders. Their hypothesis suggests that the large absorption of supply in the crypto market will push prices higher. While this is common sense, cryptos traders shouldn’t rely on this thesis.
OTC Trade
One issue with this thesis is that Institutions in this market are trading over the counter (OTC), or very carefully so they they don’t move price substantially. They operate through intermediaries, and prime brokers, keeping their large orders off the books of illiquid retail exchanges that most of us use to trade. While, if this institutional demand continues, it may thin the ask side of retail order books, we can’t expect the OTC market to drive the price strongly in a direct manner. In the current crypto market, large institutions intend to accumulate cryptos without leaving an impact on price.
Large Players Play Against Retail Trading
In a recorded talk by ex Goldman Sachs Trader, Anton Kreil, he described how large traders need retail liquidity to get in and out of trades. This liquidity is needed to both enter and exit their large positions without getting trapped. The topic matter in his talk was not cryptos, but this is true in cryptos as well. This means that at a core, institutions must trade against rank and file retailers. This means that large traders are aware when small traders are vacating their positions so they know when to absorb this liquidity. And, they need retailers to chase the trade aggressively at tops so they can begin to liquidate their positions.
Large traders watch sentiment, if they are smart. They need bullish and bearish sentiment to reach crescendo so they can enter or liquidate. Have we entered an intense capitulations phase where retailers are running for the exits? Anecdotally, no. Most likely institutional buyers are only accumulating slowly, and they may be hedging their bets on the futures exchange, until the retail exit is complete.
Don’t Ride ETF News
If you follow the market as closely as we do, you know that when ETF’s under review by the SEC are rejected, the crypto market usually moves down rapidly. Whenever it has, it has stayed within the confines of our expectations. Market action suggests that many pin their hopes on an ETF approval pushing crypto prices higher. Unfortunately, these traders are ill founded in their presumption.
While not guaranteed, don’t be surprised if an ETF approval ushers in a major market top. While this is not meant to suggest foul play, but just as large traders need high liquidity to enter and exit trades, an ETF approval is one vehicle for a large exit, just as hordes of new investors come into cryptos as an asset class, .
Therefore, perhaps we don’t see an ETF approved until the next major market top. Those that are waiting for an ETF to be approved to turn bullish, may be waiting for a long time and may come into the market too late.
Price Not News
News is secondary information in markets. Price is king. While the news that institutions are coming into the crypto market may, on the surface, seem to be bullish based upon “common sense,” there is nothing common about sense when it comes to the market. In fact, they are no ‘friend’ of the retail crypto trader. They are running a business that demands liquidity to be successful.
As we stated, continually, we expect the crypto market to attempt a turn at $4600 Bitcoin, with some potential that we see a large flush to get us there. And, this should bring the capitulation we often see at major bottoms. Yet, if we break over $6620 sooner rather than later, we may see early signs of a bottom.