Thu. Aug 5th, 2021


Price volatility is one of the major reasons why cryptocurrencies are criticised across the world. Late in May, HSBC, Europe’s biggest investment bank, said it has no plans to offer digital coins as an investment as they are “too volatile”.

Nothing unites cryptocurrency opponents like its volatility. But some analysts have observed an unusual trend: Cryptocurrency crashes tend to happen on weekends.

It is on Saturdays and Sundays when most of the asset classes are on holiday mode, that crypto volatility spikes.

This phenomenon has been observed in the crypto market for several years now, Stephen McKeon, a finance professor and partner at Collab+Currency, a crypto-focused investment fund told CNBC.

Liquidity requires a steady supply of both buyers and sellers. If there are fewer buyers than sellers or vice versa, transactions become harder – a situation that results in a spike or crash.

“People always tout Bitcoin as 24/7,365 liquidity, but what actually means is you have periods of very thin liquidity,” Nic Carter, partner at crypto venture firm Castle Island Ventures told Bloomberg.

“If you want to deploy $500 million Bitcoins, you probably want to do it during core banking hours,” he added.

The market’s 24/7 operation has set the stage for price swings when you least expect it. But is that it? Let’s find out.

Less trading

One of the reasons, according to what Amin Shams, professor at Ohio State University told CNBC, for weekend volatility is ‘fewer trades’.

When trading volumes are thin, price swings become magnified.

The market volumes rebound on Sunday night as Asian banks get ready to open and then US banks follow, McKeon continued.

Then there are crypto influencers like Elon Musk, his one tweet sparks an entire wave of activity that lasts for weeks.

Market structure

The Crypto market consists of scores of disconnected exchanges, that are, in effect their own islands of liquidity. All these platforms trade with their own policies due to the lack of a centralised market structure, akin to say, equity.

“If you think about the structure that makes it conducive to things that are going to be very volatile and where you are going to have big moves. That’s obviously going to be impacted by when people are trading, when people are awake, when people are watching the markets,” Greg Bunn, Chief Strategy Officer of CrossTower told Bloomberg.

Staffing issues

The reasons for describing this phenomenon are many. Some believe since market-makers are less staffed on weekends, the market reacts by rising or crashing.

According to the efficient market hypothesis, the market should expect less liquidity on the weekends, but “it is a feature of the market that has always been there and we expect that it will be a feature of the market that remains in the future,” Teddy Fusaro of Bitwise Asset Management told Bloomberg.

Margin trading

A burgeoning crypto lending adds to the volatility. Traders borrow from the exchanges to buy more coins. When the coins dip below a certain level, they must repay the debt, an event called a margin call.

But imagine traders not being able to repay the exchanges. The exchanges then sell the currency and get their money back.

These cases intensify on weekends as banks are closed during that time. With no money, traders struggle to repay the borrowed funds, triggering a sell-off.