Are the Whales About to Sink Bitcoin?

Bitcoin’s sharp and sudden move lower on Thursday has opened the door to further selling pressure in the near term. As Bloomberg recently reported, trading activity by long-dormant crypto accounts is on the rise, which likely means further volatility ahead.

Selling Subsides – For Now

Bitcoin reached a session low of $3,607.39 on Saturday, according to CCN’s price tracker. The leading digital currency is currently valued at $3,667. where it was down 0.8% over 24 hours.

On Thursday, bitcoin experienced its worst single-day drop since November. The rapid depreciation challenged the notion that the market had turned a corner following last month’s swing low.

As Hacked reported on Friday, BTC/USD is coming up on a major support level ($3,550). Any move lower would drag bitcoin into “GTFO” territory, according to former IMF economist Mark Dow.

The following chart is a live feed of bitcoin’s price via Bitstamp. The asset’s key momentum indicators (RSI and MACD) showcase the extent of the recent drop and how it may impact investor sentiment moving forward.

Bitcoin’s daily trade volume spiked north of $6 billion in the latter half of the week. On Saturday, BTC trades on virtual exchanges amounted to $5 billion, according to CoinMarketCap.

A recap of this week’s major events: Crypto Winter Grows Colder; Trump Goes Prime-Time

Dormant Wallets Activated

Anonymous owners of long-dormant bitcoin accounts have traded with greater frequency over the past three months, and that trend appears to be intensifying in the new year. Data from Flipside Crypto suggest that, beginning in October, a large number of dormant accounts began moving their coins again. A bitcoin account is considered ‘dormant’ if it hasn’t been touched for between six months and more than 2 1/2 years. Over the past 30 days, these bitcoin wallets have accounted for roughly 60% of the circulating supply.

It’s clear that many of these dormant account holders are preparing to become active traders once again. This is reflected by the dramatic rise in bitcoin’s circulating supply. As Flipside notes, the supply of active BTC in the market has increased 40% since the summer. A similar influx of coins into circulation preceded two major price swings in 2015 and 2017.

The sharp rise in circulation is usually a good indicator of volatility. In short, traders can expect more of it in the first quarter as coins make their way from dormant wallets to exchanges. Bitcoin’s volatility regime has increased sharply over the past two months but had moderated since the new year. That could be about to change very soon.

Below is a snapshot of bitcoin’s 30-day volatility index, as per bitvol.info.

Whales Rock the Boat

Anytime dormant wallets are activated, there’s a good chance that large holders of bitcoin are prepared to make big moves. These so-called bitcoin whales control the vast majority of the available supply. As Bloomberg notes, roughly 1,000 addresses hold 85% of all bitcoin. Many of these holders remained inactive during the parabolic surge and meteoric drop of the past two years.

“We’ve definitely seen that many long-time holders of Bitcoin are becoming active,” David Balter, CEO of Flipside, told Bloomberg. At this time, it’s not entirely clear whether they will be buyers or sellers.

The hypothesis that bitcoin whales instigate volatility has been questioned before. As we reported three months ago, whales have been shown to play a stabilizing role in the market – that is, when we consider the 32 largest wallets. This group is comprised of miners, new market entrants, lost accounts and cyber criminals (though the latter group is the smallest). More on this story can be found here: Bitcoin Whales to the Rescue?

Nevertheless, whales do contribute to volatile trading patterns, especially when large amounts of BTC are moved and liquidated on major exchanges. Against this backdrop, traders can expect further swings to the downside for bitcoin and the broader market as a whole. This is by no means an indicator of the market’s long-term trajectory, but a continuation of the bearish cycle that re-emerged last year.

Many in the crypto community are unconvinced that we’ve seen bitcoin’s bottom just yet. Some fully expect bitcoin to test and possibly fall below $3,000 before a firm bottom has been established. We covered this two weeks ago in No FOMO: Bitcoin Price Under Pressure as Bullish Optimism Fades.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

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