Just before bedtime, I did what no sane human should do. I checked Twitter. , one of my #Bitcoin follows, had posted an oblique-but-positive meme-tweet about Bitcoin’s price doing… . Marty Bent something I checked Coindesk and saw BTC’s price climbing a wall — and then spent the next 30 minutes meth-addict toggling between Twitter and the crypto-charts, watching numbers spike up from 8% to 13% to almost 20%. I felt that sweet glumness of simultaneously being happy the market was turning wishing I’d bought more Bitcoin during the doldrums. and Luckily for my dependents, I know nothing about except that I’m far too emotional for it. So — rather than late night FOMO-buying — I scrolled through a sufficient number of OMG-gifs on twitter, then went to bed. trading By morning, the dust had (semi) settled... There had been a giant price-spike, followed by a slight retreat as opportunistic sellers collected gains, and a (temporarily) reset price about 14% higher than the same time yesterday. More importantly, the new plateau represented a dramatic shift from the smallish, inconclusive price moves Bitcoin has seen over the past few months. But with this big one-hour jump, I had the opportunity to scratch a curiosity-itch that has been with me for a while: How does the liquidity of Bitcoin’s market affect its price? In other words — and there is probably more market-savvy terminology to express this idea — how much of Bitcoin’s price movement is a function of the number of people willing to buy or sell it, rather than ? long-term-hodl* The Bitcoin term “ ” is said by some to stand for “ old n for ear ife” — which is incorrect. It was actually a drunken typo. By the Roman playwright Tacitus. But I digress. But regardless of ’s origins, it expresses a common sentiment among hardcore Bitcoiners: Except in dire circumstances (war, famine, poker losses), one simply does not sell. hodl h o d l hodl Bitcoin’s overall market capitalization was, prior to yesterday’s spike, around $71 billion USD. Now that’s up to $83 billion and change. Bitcoin is famously ruled by supply and demand — even more so than other commodities—because it has a fixed, scheduled, merciless supply schedule. Eventually this will culminate in 21 million bitcoins; today it is about 17.6 million, ticking up block-by-block. (The way this works is fascinating, but and I won’t do so here.) it’s well-explained elsewhere Let’s do some napkin-math. Over the course of the hour where this action took place, five or so “blocks” were added to the Bitcoin blockchain, so 62.5 new bitcoins entered the world. Against a 17-million supply, that’s inconsequential. The price rise — equating to $12 billion in market cap — took place because of the sale of existing bitcoins. (I know, “duh,” right? But stay with me.) bitcoins had to sell in order to drive up the price like this? According to BCB Group’s Oliver von Landsberg-Sadie ( ), the impetus was three 7,000-bitcoin buy orders spread across three trading exchanges. How many quoted here by CNBC The reasons for this mass purchase are subject to speculation, but many suspect a “short squeeze” — a big trader who had previously been betting Bitcoin changing his mind and buying the requisite coin to “cover” his financial exposure. Without enough willing sellers, he this anonymous buyer was forced to bid up prices in order to close out his “short” position. against As in any market, when you need to buy a lot of something in a hurry, people notice…and it’s tempting to give you a crappy deal. In the amoral world of currency trading, such temptations always win. Let’s assume that von Landsberg-Sadie’s numbers are correct and it was 21,000 bitcoins purchased that drove BTC’s price from $4,170 to $4,885. This implies “only” $95 million of purchasing. Think — how weird is that? $95 million of equated to $12 billion in . money actually spent perceived increase in market value If you, like me, don’t work in finance, this sort of thing makes you pause, blink, check your numbers, blink again, etc. Because those numbers show 125x leverage on compared to what . what actually happened seems to have happened The market, over the course of an hour, got $0.034 greedier as this big buyer revealed his intentions. per bitcoin sold This price jump was possible only because of the “thin liquidity” of the Bitcoin market. There are currently 17.6 million bitcoin in the world. It’s been estimated that 3–4 million of them are lost forever, due to early users who weren’t careful with their digital wallets’ “keys.” That means, in practice, there are only 14 million bitcoin available to buy today. And means that this whale-sized buyer, with a 21,000 BTC appetite, was trying to buy up 0.15% of In one hour.* that all the bitcoin in existence. It’s cool that this is even possible. In no other commodity, ever, has this been technically feasible. If some Chinese emperor had wanted to buy up 0.15% of the world’s rice supply — despite having the money and the soldiers to do so — he couldn’t make that decision, negotiate a price, take physical custody, and be assured he’d succeeded, inside of an hour. The technology just wasn’t there. Let’s think about a financial market’s liquidity for a sec. Bitcoin’s price went up because there were willing sellers — and these sellers realized they could charge a premium and get away with it. But most people who own Bitcoin don’t keep their digital assets stored on the exchanges where the buying happened. The actual available for this whale to buy from was only a small subset: , where… people A x B x C number of people who own Bitcoin A = percent of who were keeping their Bitcoin on trading exchanges during the hour when the whale got hungry B = A percent of who had established prices at which they’d sell C = B How many such people were there, and how many bitcoin did they represent? We don’t know those answers — except that there were at least 21,000 BTC they could pony up, and that the incremental cost of getting them to do so was 3.4 cents for each and every BTC_._ over the previous market price Let’s extrapolate. What follows is loose, back-of-the-napkin math, but the point is important. Last night’s price move implies that if a whale entered the Bitcoin market looking to buy 445,000 BTC —an amount which is only 2.5% of the world’s final, circulating supply* — . today this would drive up Bitcoin’s price past its $20,000 all-time high * Current coins, minus presumed-lost coins, plus all future to-be-mined coins. Now, back to reality: no one will be surprised if over the next few days, some bitcoin owners take profits from this sudden price-jump, and Bitcoin’s market cap sinks back down a bit. But the larger lesson should give us pause for reflection… If some vastly wealthy entity — a nation-state, a sovereign wealth fund, etc.— decides that the market is undervaluing a commodity, and wants to buy up a mere 2.5% of the global Bitcoin supply…today’s price quadruples. provably scarce, un-inflatable, digitally-deliverable Then consider: what happens when rich entity FOMOs and decides to buy up one percent? another another

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The Hidden Implications of Bitcoin’s Overnight Price-Jump

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