Bitcoin wallet immature
As reported in ValueWalk earlier this morning, the price dive occurred as talk of a crackdown in the U.S. and Russia came on the back of a technical glitch hitting the largest Bitcoin processor, Japanese-based Mt. Gox, all of which riled participants in the bitcoin market.
This drop in price was notable for several reasons.
The spike lower occurred on heavy volume but thus far the volume has not outpaced that on December 6, when Bitcoin had ended a three-day drop from $1, 077 to $551 or the drop from $869 to $420 that ended on December 17.
But perhaps most rattling to Bitcoin market participants is the sheer size of the drop, moving significantly below support to the $102 area. This has the look of a flash crash, as the market knifed through its previous trading range into lows not seen since October of 2013.
One professional trader noted that Bitcoin had established a range and that trading significantly below that range and then snapping back to “normalcy” is a sign of a market in need for maturity. Early talk is that Bitcoin needs a more professional market making system similar to the derivatives markets and the move lower was a result of a large volume trader.
The move in question, highlighted in a 1 minute and 15 minute price chart above, took place at approximately 4:54 AM EST on approximately 4, 000 contracts traded in a one minute time frame, bringing the price of the currency to its knees. It then recovered near 5 AM on a little over 1, 000 contracts, trading near the $600 level.
Professional market makers who do speak about Bitcoin note that the contract is challenged due to the difficulty to hedge risk. Most financial and commodity markets have a built in mechanism for the market maker to immediately hedge their exposures through markets with similar characteristics. However, Bitcoin is difficult to hedge because its price movement is considered independent of other established financial products such as bonds or foreign exchange products. Other digital currencies are too immature and illiquid to provide an accurate hedging environment for the market makers.
