Market Watch Ep.17: Crypto volatility & what next for Bitcoin

Very good morning, it's Friday, 21st of May, and welcome to episode 17 of the Market Watch. And as ever, I'm joined by Piers Current, our head of trading, who I saw for the first time— trying to think, is it, is it in 2021? It can't be, surely.

Yeah, it is, isn't it? Yeah, we met on Well, when was it? Wednesday morning, and you, you still exist in the flesh. Yeah, so the first time, the first time this year.

Yeah, we had a nice romantic walk down Little Venice into Paddington. Very romantic. But, uh, yeah, we weren't just like going on jollies, going in for a walk in the sunshine. We had quite an interesting meeting. But, um, but yeah, anything else going on this week, Piers, outside of— outside of Markets and Amplify. Yeah, going on in the world of Mr.

Curran recently, going on in my life, uh, a bit of a dull week actually, other than obviously meeting you, and, uh, nothing too major. My kids are, um, my daughter's got exams coming up next week, so I've actually been helping her with her maths, so I'm doing some quadratic equations. And, uh, so, so yeah, it's, um It's amazing what they're learning these days at 14 years old. I don't remember doing stuff that complicated when I was that young, but I don't know, it was a long time ago. Maybe I did.

Okay, okay. Yeah, as I told you, I've been, um, I've been cracking through my Wayne Gretzky, uh, master classes, and, uh, I didn't realize that— I always thought it was my idol Michael Jordan coined the phrase, you, you miss 100% of the shots you don't take. And in fact, it's Mr. Gretzky—

oh no—

who revolutionized his career at midpoint because he was too unselfish a player, right, to become more selfish, to score more goals, and then hit the magic.

So what, what is the— what is their sort of conversion rate then? I mean, goals to actual shots.

Oh yeah, you're asking me an ice hockey trivia question.

All right, well, what about Jordan?

He— well, I would say percentage-wise, without knowing the stat, he would probably have only made 25%. That's low. Yeah, oh yeah, his— yeah, his, his field goal percentages were not amazing. Because guys like him shoot the ball a lot.

Yeah, basically just pass it to him and he shoots. Yeah, yeah, okay.

But, um, but yeah, so yeah, I mean, if you fancy that on MasterClass, I can give it, uh, my backing.

What's his angle then? Obviously he's not teaching— well, maybe he is literally teaching you how to play ice hockey, or is it more about—

no, no, it's about psychology.

Okay.

And the reason why that is good, and I think any market person can testify to is that I don't think you can ever learn enough about mastering your mindset and your confidence and things like that. And obviously, as we've discussed, I think in previous episodes, the transition or translation, if you like, of, yeah, skill sets out of sports into trading.

Absolutely. And there's a lot of— some of these kind of iconic sporting figures, I've done a lot around there. Michael Johnson another one, um, US athlete. He's done a lot around sports psychology and how he dealt with the, you know, the pressures of like an Olympic final and a mindset and being present and in the moment.

And it's, yeah, hugely, um, yeah, I, I read, I read, um, his book and he had a really good one where he was the up-and-coming like main athlete, obviously the 200, 400, going into the Barcelona Olympics, right, in '92. And he was, um, he was in— he went to Barcelona and then he had some tapas, got food poisoning, and didn't win. And he was like— it was like a shoo-in, and he didn't actually get the gold. And then that was when he did like the big double in Atlanta, if you remember, and he had the gold shoes.

Yeah, yeah. And it was his home Olympics and the pressure was even greater. Yeah. So the tapas did it. Well, that's, um, well, you know about Usain Bolt, right, and his pre-race prep?

Not— I think, I think— I think nuggets. Yeah, I know he's favorable to a few nuggets just to get things going.

Nuggets just to, um, as part of his warm-up.

Any, um, was that your trading routine? A couple of chicken nuggets from Liverpool Street before you kick off?

I don't think it— ah, no, it was, um Marmite on toast from, uh, oh God, what was the name? Very iconic sort of city cafe. God, I can't remember the name.

Fuzzy Grubs?

Not Fuzzy Grubs. Yeah, something like that. It's been knocked down years ago. Bloomberg, the Bloomberg building is now there. But yeah, Marmite on toast, Granary, Granary Bread.

Okay, I thought you weren't superstitious, you said previously.

I'm not. I just like Marmite on toast.

All right. Well, now you've had your Marmite on toast this morning, I'm sure. One thing I wanted to do with the conversation today was steer it a little bit more in a direction of cryptos being the big talking point, of course, because we had that midweek shakeout, if you like, and we saw a massive move across the crypto space. And we saw a number of different things. There's lots of different factors, but namely, it's been building up a little bit. Obviously, it's been quite elevated in price. It's been drifting, trending low in, say, Bitcoin. Musk has done his U-turn on payments. You've had the PBOC in China talking about the fact that, look, digital tokens aren't going to be recognized here. And it felt like these are just triggers. They're almost like the match that lit the fire and then the market fell out midweek. We have reversed, I must say that, and the prices are pretty much even, not to draw, basically scratch from looking at Bitcoin specifically rather than any of the others right now. But one of the things here that I wanted to talk about is more from a trading angle. I know neither you or I are qualified enough to really understand crypto and DeFi and these subject matters to many others out there. But we are qualified to talk about mechanism behind— the mechanics of the move on Wednesday. And one of the things, or a stat that I saw this morning, was now that the kind of dust has settled, data shows liquidations have totaled roughly around $10 billion since Wednesday. So I just wanted a bit of an explanation of why liquidation, it's linked to leverage, and the impact on price movement as a subsequent factor.

Yeah. I mean, so really the price of anything— I mean, if you think about— forget what it is in terms of an asset and its fundamental value. Just forget that for a second. The mechanics of price is really just determined by buyers and sellers in the marketplace. And it's just a function of buyers versus sellers, right? And that kind of perennial battle. And the way these order books work is that you're going to have buyers coming in to buy, and you'll have sellers that are selling, and these get matched, right? The buyers get matched with the sellers, and fine, they trade at a specific price. And if there's more buyers than sellers at any point, well, then naturally the price of this asset gets driven higher. And if there's more sellers than buyers, and then it gets driven lower. But every now and then, you'll get a monster mismatch between the volume on the sell side of the book versus the volume on the buy side of the book. And when you get this huge mismatch, then you get big market dislocations. And this is, this is where you get a liquidity crisis, basically, when you've got so many people that are wanting to sell, or so much volume that wants to sell, there isn't enough volume on the buy side of the book to be matched with that. And so the price collapses, and, and then this obviously then just snowballs and triggers even more selling because lots of people are, as you mentioned, they're leveraged up and they're, you know, they've got certain stop limits that literally they can't go below and they're forced out of positions. And so as the price starts to drop more rapidly, it just then triggers these stops that then just only makes matters worse as the volume on the sell side of the book grows and grows and grows, and the mismatch between the sell side and the buy side volume increases, and then the acceleration to the downside, you know, goes through the roof and you get a collapse.

Um, and in that, on that increased volatility, I guess just by nature of some of these platforms aren't quite as matured as, say, traditional asset and products that Coinbase, Binance, Kraken, they all— in these episodes, they all typically freeze as well, which is exactly the case on Wednesday.

And that just breeds panic because if you own this asset and the price is collapsing, you're like, oh my God, and you get caught up in the panic of it and you go, right, I want to sell, I want to sell, and then you can't sell. And then you're locked out and all you can see is price dropping. And then this is— so there is, yeah, this is broker risk, it's market access risk, and in these immature markets and these immature exchanges, you know, it's a bigger problem. It's, you know, it's not like trading on the New York Stock Exchange where obviously this exchange is geared up for this kind of stuff. But even like, I remember actually now thinking about it, even the NASDAQ had a problem when when Facebook IPO'd back in 2014, the NASDAQ went offline for like— or Facebook trading in the NASDAQ went offline for like 30 minutes because it crashed the system. So I mean, it does happen in some of these big main central stock exchanges, but hardly, hardly ever. But in immature exchanges, it happens all the time. And I think— Traders that are new to, well, trading perhaps don't quite appreciate that's the risk, you know, that the kind of mechanics behind actually how do I execute my position, and is there a problem there? Am I going to be able to trade when I want to trade, uh, or not? And, and in the case of not, that then breeds panic and just makes the sell-off all the larger. I was looking at some stats in terms of that sell-side volume and the Binance. Basically, that's apparently— that's where the kind of sell-off kind of got triggered on Monday. And apparently there was 53,000 bitcoins dumped into the exchange to be sold. And to get— and so that's where that sudden big sell-side volume, you know, dominates and overrides any buy-side volume, and you get that downside. But that's some— so 53,000 bitcoins. I was looking it up, so I'm not quite sure where we're up to now in terms of how many bitcoins of bitcoins there are out there in existence, and there's currently 18.7 million bitcoins. So 53,000 in one go, so that's 0.3% of the entire global, uh, supply of Bitcoin. 0.3% got dumped on the market to be sold. I thought, well, hang on, is that a lot? Is that not a lot? 0.3%, I mean, doesn't sound too much. So I kind of translated it into Apple shares. What, what, how many shares if you sold 0.3% of Apple shares and issuance? That would be 50 million Apple shares. So that, that 53,000 Bitcoin trade is, is in some ways equivalent to just dumping 50 million Apple shares in one go.

Wowzers. Well, I'd love to be covering the mic when, uh, when you see someone come in and dump 50 million Apple shares, but Yeah, wow. Yeah, I think I remember, um, wasn't Will short Euro Swiss and he couldn't get out of the trade? Yeah, I can't remember the details on that.

January 15th, um, his birthday. I can't remember the year now. When was it? When, uh, it's going back, 2015. Was it January 15th, 2015?

Yeah, I think it was 2015.

And yeah, that was, that was a bit different. That— so he was in— he was short futures and the market went limit down. So what happens in some markets is you have these limit down or limit up mechanisms where the market closes for trading for 10 minutes. It depends on the market and the exchange, actually, but I think in this case it was 10 minutes. And then that just allows traders to kind of calm down, regroup, and then there's an opening auction where bids and offers get put back onto the order book ahead of then the market reopening for trading. So you get this kind of blackout period, which is designed to try and halt these capitulation and collapses. It's just breakers, if you like, in the system. And so, yeah, Will was short but couldn't trade. I mean, the market was collapsing. So this was a really— if you're going to be the one, he was the right way round. So he was fine, but the spot market was still trading, and we could see that the spot market was still heavily pushing lower and lower and lower. So whilst he was locked out of the market and couldn't trade, actually, based off the spot movement, his position was just getting more profitable and more profitable and more profitable. So it was fine, right? The worst-case scenario is when you're the wrong way around, you know, you're, you're long in a falling market and you can't get out.

So in your trading years, I mean, from a psychological perspective, just kind of really narrowing in on that, because I'm sure it's an episode that everyone will encounter at some point, whether it's a mechanical failure on an exchange or even on your computer.

Yeah, right.

At some point, something's going to go wrong out of your pre-planned control, let's say. Or that you could have planned for. So any experiences of that, and how did you react to that when that did happen?

Yeah, I think that, well, when I was trading for a US company, there were contingency plans where there were offsite servers. In fact, they would call the guys in the US, the US office, and they would be able to access and trade on our accounts from the US office. So that was, that was covered, right, in the case that our internet connection dropped or, or whatever, the— we had a power failure in the building, then that was always the contingency plan. I remember it happened a couple of times, um, it's fine, you just get the risk— I mean, you're, you're right, you can't do anything. So there's just the risk team are then on the, on the phone, emergency calls, and they would just pick it, right, which traders in the largest position, let's start there, okay, get get them out of that trade. And then you just work down the list. And if you're really junior, it might be a few hours, and then, all right, they take your position off. Because it doesn't matter for the company. Of course, it matters for you. It's your trade, and it's your book. And right, you're junior trading small size, but it doesn't feel like that for you. And so, but there's nothing you can do in those situations. I'd say it's dangerous— like, people trading on their own, their own account, trading from home, let's say, and trading— if you're trading large sums of money, you definitely need a contingency plan in place, um, because, you know, internet can drop whenever, right? And, and so, you know, it's having a third party you trust who's not in your building or not in your house, who, who, if you're having a, an internet failure, hopefully they're not and having some kind of system for, for dealing with trades if needs be.

Okay, well, let's, let's, uh, progress the conversation on, on the crypto front. And one of the things is I know that, um, crypto is undoubtedly becoming more and more popular. I spoke to none other than our previous teammate Sam North earlier this week, and right Anthony Cheung, he works for one of these big platforms now. And in terms of trade activity, he said it's basically 100% crypto now. It's not even— if there's a scrap of forex, it's like 1% to 2% of activity. But he does work with a platform that generally is more geared to, I'd say, a younger demographic. So it makes sense in that regard. But As it gets more popular, are you feeling in any way moved yet, getting drawn into the crypto conversation in a more general terms, or are you still fairly standoffish at this point in terms of just generally? Look, I know you're a busy man with other stuff going on beyond just looking at markets and trading, but yeah, has it started to entice you in at all, or—

Yeah, I think I'm definitely happy to be involved in the conversation. I'm definitely not a crypto expert, very, very much the opposite. But I think one day we'll have a podcast on this. Maybe we'll just go at it because I'm on one side of the argument, let's say, and it's not the side that those crypto fans like. Let's just leave that there for now. But I'm keen to get involved with the argument. I've never traded a cryptocurrency ever. Now, do I regret that? For sure. I mean, I was around trading 12 years ago when Bitcoin was invented, right? And fine, I probably didn't hear about it. I can't remember now. It's probably a couple of years till I started to get wind of it. And I was like, what's this thing? Forget that. Obviously, if I could go back in time, I wish I'd bought cryptocurrencies. I would have never have bought them because I think they're currencies. Let's just make that clear. And I definitely don't think they're currencies today. And we'll argue about that one on a podcast in the future. But just as a straight-out trade, I mean, don't get me wrong, these things have gone gone through the stratosphere, right? And people have made a lot of money. But it's the volatility levels of this thing that is absolutely brutal and super dangerous if you don't know how to deal with volatility. And I think a lot of the younger demographic that are coming into trading are naturally leaning towards markets that are super volatile because it's exciting. And that's where the FOMO is, because their mates have made X numbers of thousands and have bought themselves a Tesla, um, and they're like, oh, hang on, I want a Tesla, great, where do I buy? And, and so that these— it's really dangerous, um, when it comes to, you know, yeah, inexperienced people trading super volatile assets. But even though, like, obviously Bitcoin's collapsed— is collapse the right word? It's corrected. I mean, collapse, it's probably a bit early to call it a collapse or capitulation. It's a correction at this point. But look, I mean, the point— what sums it up, right, even though it's corrected, as long as you bought Bitcoin prior to the 21st of February, 2021. As long as you bought before then, you're actually still sitting on a nice profit. And obviously, the, the earlier you bought, the bigger the profits. And let's get this into context— most people here aren't sitting on losses. Most people are just sitting on less gains. Um, now if you have been involved though in the last couple of months, then fine, you're now— you're hurting, and you're perhaps sat on something that's looking like a really large loss. And you're the people that are at risk because prospect theory, you know, you're right in that point now where you've lost control, lost control of yourself, lost control of your trade, and you're just sat back and just hoping it kind of rebounds. But actually, looking at the kind of stats, Bitcoin has had plenty of— as I said, it's a super volatile asset and always has been. And this is just one more episode, one more volatility episode along the journey, and it's definitely not going to be the last one. So, so far, I mean, look, we're— the 14th of April was the high. So we're kind of 20-odd days into this correction, let's call it, which actually for Bitcoin is quite a long period. And we'll talk, you know, is this the end? Perhaps our listeners really want to hear what we think about— maybe they don't— but do we think this is the end of the sell-off? Is this the bottom? And actually now the carnage is done and things will start moving back up? Or actually quite the opposite, is it— this is just the beginning of what's going to be an even bigger wave to the downside? And unfortunately for our listeners, my answer to that is I've got absolutely no idea. But I can tell you what might trigger one or the other scenario, and I'll mention that in a minute. But in terms of right now, we're 20-odd days into this correction. And actually, there's hardly been— there's only— I'm just looking back now. There's been 4 or 5 corrections in its history that's lasted longer than this. Only 4 or 5. And I don't know how many corrections there have been. But maybe you can tell me that, Anthony.

Yeah, I mean, there's a stat I saw was over the course of the last 11 years, so going right back to the beginning.

Yeah.

If you were talking about instances of a daily change of 5% plus, there's 750.

Okay.

If you talk about instances—

Yeah, okay.

Yeah. So, so, so let me give you a bit of context, because for people who don't follow markets closely, it's— I think it was 2018, I think the S&P 500 daily range was 0.18%. 0.18 average daily range.

That was the dullest year.

It was just a period of we're just going up, basically. Um, that, that horrible thing, things just appreciating. But yeah, um, so, so if we go back to the stat on Bitcoin then Yeah, um, the number of times over that decade period that it's gone more than 20% in a single day.

Okay.

Of which you could probably count on your hand if you're talking about your stock.

You're talking about—

oh yeah, single. I'm talking in, yeah, daily moves, daily changes.

Yeah.

So how many do you reckon in, in 10 years that it's done more than a 20% percentage change?

In one— in that one day? Uh, it can't be that, man. I, I'm gonna say 25.

Yeah, it's nearly 50, right? So to, to, to your argument, yeah, I mean, I mean, how many days were there when the stock market in the financial crisis was down 20%? I mean, from what I recall, never. I mean, any stocks were down single stocks were down 20%. Yeah, but the mechanism— exactly, the mechanism that you mentioned, the limit-down circuit breakers— your exchange is done if it ever got near 20%, uh, and long before that threshold.

This sell-off that we had, like April, mid-April, down through the low that we had earlier, um, in the week was a— was— and I— these numbers I'm about to throw out, these are based on the futures price of Bitcoin. So it might not precisely marry together with the actual underlying Bitcoin, but it'll be roughly similar. So we've had a 54% sell-off, okay, and now it's bounced and kind of stabilizing. Um, so it's been 20-odd days so far. So we've had— we— and, and these, these, these sell-offs go in bursts. So you have like— so we had basically 5 days that you have a wave of selling, and then it consolidates, and then you have a wave of selling, and then it can consolidate. And those waves of selling don't last long, but they're huge in terms of the distance that price covers. So we had— so it's kind of goes in fits and bursts. So we had 5 days of selling off, um, sort of second half of April, then it consolidated for 13 days, then we had 6 days of heavy selling, and now it's consolidating again. And this is what happened actually back if you look back at the previous big sell-offs in Bitcoin, so in 2017, '18, there was a massive sell-off. And in the end, if you look from end of 2017 through to the end of 2018, actually sold off 84% in total. But that first wave, it sold off from $20,000 down to $6,000. That kind of went in 5 days collapsing, 13 days consolidation. It then had a 2-day massive collapse, then 8 days consolidation. Then had a 6-day big sell-off and then consolidation. So you kind of— so right now we've kind of had 2 waves down, I would say, in my opinion, at the moment, second half of April and then end of last week, start of this week. And so we're now in another phase of consolidation. And do we now wave lower? We've dropped 54%. And in the grand scheme of things, you know, we've had big episodes like in 2013, it sold off 87%. actually twice in 2013, it sold off over 80%. So I guess my point there is it's dropped 54%. So can it drop further? Yeah, can. Has done before. In fact, start of 2020, in Q1 of 2020, it dropped 60%. People don't remember that, do they? That was only 12 months ago. But it can definitely— my point is, don't think it can't go any lower because we've had such a big sell-off already. Already. It definitely can. That doesn't mean it will. And I'd say technically— and Bitcoin and crypto generally, technicals are a hugely powerful thing on this market. And that's because, in my humble opinion, there's not much fundamentals that drive this asset and its value. So it's more about technicals, and it's more about behavior. OK? And so I think there's two big technical levels. So one's the floor that we hit on Wednesday at $30,000. And the reason why that's technically important is because, well, not only is it the sort of a big round number, but it's also that, that low point that we had in, in January this year. So $30,000 is the, is the January '21 low. Okay, then, so that's the downside floor, and then the upside, uh, resistance is around $42,000, and that was the January high, and it's also, um, the March low from, from from 2021. So you've got your two technical levels here. We're in the middle of those two now. So where does this— where does this price go next? Depends which of those lines get— gets broken. If $30,000 gets broken on the downside, we are going further down. We're going to get another big wave, big wave lower, like the waves we've already seen. But if $42,000 gets broken on the upside, well, then actually this could well be the end of this correction and we'll kind of get back to stabilizing. So it's very technical, and right now we're trading in the middle of these two levels. So $30,000 on the downside, roughly $42,000 on the upside. So where does this thing go next? Whichever of those lines gets broken first, I think, will then drive direction for the next few months.

Okay, well, and on that, let's wrap it up there for this episode. And just as a reminder to anyone listening, do check out the Amplify Trading YouTube channel. And the reason for that is because we shot an interview just over a week ago with someone who is in a very famous trading book by Jack Schwager called The New Market Wizards. Her name's Linda Rashke. She's like a trading legend in the States, over 40 years experience, and she's such a fascinating woman. She's done like competitive bodybuilding and she's ran a hedge fund. She's one of these people you read about and just go, what, when they start talking about their life experience. But some really, you know, fascinating conversation. And she's asked us to put that out to, to everyone, and I will do so later today. So you'll be able to access that from our trading YouTube channel. Otherwise, Piers, have a great weekend, uh, and same to everyone listening. Takatsuki.