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In One Chart - April 4, 2019

In One Chart: Cryptomania Part Two?

Remember Bitcoin? You know, the cryptocurrency that led the decentralized currency revolution and was going to change the world? (Then… didn’t.)

It’s hard to believe it was only 15 months ago, in December 2017, that Bitcoin’s price crested $20,000. At that time, retail investors heralded the future of payments, regulators asked, “Bit- what?”, and some guy accidentally threw away the hard drive on which he stored his cryptocurrencies worth $127 million.

Oh yeah. Now it sounds kind of familiar.

Then in the twelve months that followed, Bitcoin fell to around $3,200 (an 84% drop) and everyone promptly forgot it ever existed. Well, people are remembering again.

On Tuesday, Bitcoin spiked nearly 20% in less than an hour and broke through the $5,000 mark; it has continued on a slight upward trajectory since. What caused the sudden jump? It’s not exactly clear.

Below is a price chart for Bitcoin and other major cryptocurrencies that followed it higher, with some even eclipsing Bitcoin on a percent-change basis.

Click to view in YCharts

Both market analysts and crypto fund managers have responded that they’re not entirely certain what caused this week’s spike. (Remember that there are no fundamentals for cryptocurrencies, when the price goes up, it’s simply because people bought more. When the price goes down, it’s because people have sold more.)

However, one popular theory points to another of investing’s recent disruptors: algorithmic traders.

Since September 2018, 17 new algorithmic or quantitative crypto funds have popped up. In total, algo crypto funds (that’s fun to say) account for more than 40 percent of all crypto hedge funds launched in that time period. There’s also an unknown number of similar funds operating under the radar, according to Wei Zhou, CFO of the world’s largest crypto exchange, Binance.

According to Oliver von Landsberg-Sadie of London-based crypto firm BCB Group, the recent price action was likely the result of an automated $100 million trade across three separate crypto exchanges, although nothing is certain.

One reason this algorithm could have been triggered to buy is a similarly recent increase in activity of digital wallets holding crypto assets. Digital wallets can be likened to brokerage accounts, but are strictly used for trading and storing cryptocurrencies.

Digital wallets have recently become more active. While about half of all Bitcoins on the market have recently resided in digital wallets that have been inactive for one to six months, since March 15th only 10% of Bitcoins are in inactive wallets. Were crypto algos woken up by the recent at-large activity?

Another possible contributor is a broader rebound in risk appetite. Even amid falling bond yields and expectations of lower earnings in the first quarter of 2019, equities have had their hottest quarter since 2009.

Add in a splash of irony — Cboe Global Markets, the first company to launch any crypto futures asset, recently announced it does not plan to list additional Bitcoin futures contracts — and “Cryptomania Part Two” is gearing up to be quite the sequel.

Will the second installment be like The Godfather Part II, awesome and totally worth it? Or more like Taken 2, literally the exact same story?

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