Unveiled: Identifying the Crypto Crasher
1) On Thursday, we published our weekly ‘Matrix on Target’ report, warning Matrixport’s institutional clients that Bitcoin could drop -13% due to elevated China risks. A mere 18 hours after the publication of our report, Bitcoin crashed by -10%. We, and our readers, were on high alert, as we had already warned on August 7, 2023, that a -10% correction could occur once the Bitcoin uptrend from early 2023 was broken.
2) Some tried to pin the crypto crash on a WSJ article released at 3:22am HK/SG time on Friday (or 3:22pm NY Time) that mentioned Elon Musk’s SpaceX might have sold $372m worth of Bitcoins.
3) Others tried to blame the news that one of China’s property conglomerates filed for Chapter 15 bankruptcy in New York at 4:45 am HK/SG time (or 4:45 pm NY Time). But Chapter 15 is merely used to protect the US assets of the company from creditors, and Evergrande has been bankrupt for two years now, we would argue.
4) Bitcoin, Ethereum and the crypto market started to crash at 5:40am HK/SG time (or 5:40pm NY time) – when most traders were not at their desks.
5) It is unlikely that Asia-based traders were intentionally or unintentionally trying to crash the market during the early morning hours. Traders in London are nearly asleep during that time while NY traders are on their way home. This leaves Chicago-based traders one hour behind NY time due to the time difference, as the ideal entities to push the market around during those graveyard hours.
6) Chicago-based crypto market maker and liquidity provider, Cumberland comes to mind with their 540 West Madison Street headquarter in Chicago. They are known to be savvy traders and have a proper risk management approach. Bitcoin had gone sideways for six weeks with the realised 30-day volatility being crushed to just 17-18%. This impact has made buying Bitcoin calls very cheap while at the same time, a correction was likely - as we had repeatedly warned during the last month.
7) Checking Etherscan, which records spot transactions, we can see that Cumberland transferred 8,000 Ethers to Binance and Coinbase before the market crashed. Once the market calmed down, they then moved 4,000 Ethers from Binance to one of their known wallets, a sign that they shorted the market and bought back at lower levels.
8) They appear to have anticipated this drop and a mere 1,000 Ethers appear to have been the tipping point that caused the market to crash as the market entered the extreme low liquidity window between 5:30am to 6:30am (HK/SG time, or 5:30-6:30pm NY Time). This is the time when most liquidations occur without any major news. As those 8,000 Ethers were split in different orders, this was prudent risk management instead of a deliberate break of the market.
9) Once Bitcoin declined sub-28,400, aggregate futures open interest declined from $10.7bn to $10.3bn and once the $28,000 level was broken, open interest declined to $8.4bn in one big washout. The funding rate changed from +16% annualised to -44% as traders fell short on the break.
10) $855m futures were liquidated, with OKX accounting for $312m, followed by Binance $192m, Deribit $139m and Huobi $110m. The perp funding rates were excessively trading at a premium, a sign that the market was disproportionately long, compared to historical positions. We noticed this a few days ago and concluded that many traders must have levered long and we kept stressing that the market could gap lower back to $26,000 / $25,000.
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