Bitcoin's wild weekends turn efficient market theory inside out

LONDON (BLOOMBERG) – Bitcoin just notched one of its best weeks on record, surging about 40 per cent over the seven days through Friday (Jan 8). Anyone expecting the notoriously volatile digital currency to take a breather this weekend had better buckle up.

It’s on Saturdays and Sundays, when most other assets barely budge, that Bitcoin tends to go particularly nuts. Take the first weekend of 2021. Coming off a 300 per cent gain last year, the world’s largest digital coin rose as much as 14 per cent Jan 2 and another 10 per cent Jan 3, a period when most of Wall Street was still in holiday mode.

Bitcoin’s not alone in trading all day, every day. What sets the coin apart is how big its price swings are outside of established business hours.

The cryptocurrency’s weekend volatility spikes owe to a couple of factors. One is that it’s held by relatively few people – about 2 per cent of accounts control 95 per cent of all available Bitcoin supply. If these whales trade when volumes are thin, price swings will be magnified. Another is its market structure, which consists of hundreds of disconnected exchanges that in effect are their own islands of liquidity.

“People always tout Bitcoin as 24/7, 365 liquidity, but what that actually means is you have periods of very thin liquidity,” said Nic Carter, a partner at crypto-focused venture firm Castle Island Ventures. “If you want to deploy US$500 million (S$663 million) of Bitcoin, you probably want to do it during core banking hours.”

According to Greg Bunn, chief strategy officer at digital-asset firm CrossTower, the market remains hugely fragmented from an infrastructure standpoint.

Many platforms operate under different standards and with “different philosophies,” said Mr Bunn, who spent decades with firms including Citadel and Deutsche Bank. Yet it lacks a centralised market structure akin to that of traditional assets, which tend to have common means of custody and settlement, for instance.

“If you think about the structure, that makes it conducive to things that are going to be very volatile and where you’re going to have big moves,” he said. “That’s obviously going to be impacted by when people are trading, when people are awake, when people are watching the markets.”

To Binance.US’s Catherine Coley, Bitcoin’s wild weekend patterns are reminiscent of her time trading currencies in Hong Kong in the early 2010s. Volatility sometimes became subdued during lunchtime lulls and around holidays. Professional traders, she says, tend to keep Monday-through-Friday schedules, so it makes sense that liquidity – or how easily an asset can be traded – would wane on weekends.

If there are fewer buyers than sellers – or vice versa – then that makes transactions harder, a situation that usually leads to either a spike or crash in prices.

No one knows for sure and theories explaining Bitcoin’s weekend action abound.

Mati Greenspan, founder of Quantum Economics, says that while institutional players have been in the spotlight recently, retail investors could be re-entering the space again, as well. They played a big role in Bitcoin’s notorious 2017 run-up – and many got burned when it crashed the following year.

Bitcoin trading volume has increased, hitting a record recently, with about US$80 billion changing hands on a weekly basis, according to data from researcher Messari.

“We’re breaking through barriers at breakneck speeds,” said Mr Greenspan. “This entire move from US$10,000 to US$40,000, this is mind-blowing and I’m saying this as someone who witnessed 2013 and 2017 – it’s just much bigger.”

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