Analyzing bitcoin price movement on April 25th

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On April 25th at 5:05 p.m. ET, TheBlock reported that the New York Attorney General’s Office (NYAG) was initiating a lawsuit against the Bitfinex exchange and its loosely associated stablecoin (Tether), in a probe to uncover ongoing fraud. At 5:18 p.m. ET, The Wall Street Journal reported that Bitfinex used US dollar reserves, which were backing Tether, to cover an $850 million loss of client funds in 2018. While price action immediately following the news reports was muted, nearly one hour later bitcoin prices began declining rapidly. In this report we diagram price movement and volume across various exchanges.

According to documentation filed with the Supreme Court of the State of NY, in late December 2018, executives at Bitfinex and Tether became concerned around the availability of funds held in accounts at Panama-based firm Crypto Capital. Principals at Crypto Capital claimed that Bitfinex assets totaling $850 million had been seized by government agencies in Portugal, Poland, and the United States.

Following the discovery by Bitfinex executives, documents reveal that Bitfinex undertook actions to receive a line of credit from Tether of up to $900 million. The line of credit is secured by 60 million shares of DigFinEx, a holding company associated with Bitfinex.

At the time of documentation, Bitfinex was determined to have received $700 million from Tether. Since December 2018 Tether coins have not been fully backed by US dollar reserves. On March 14, 2019, Tether changed its terms and conditions to state that each Tether is not fully backed by USD rather backed by loans Tether has initiated and other assets. Given concerns that Tether was not fully backed by reserves – as had been previously declared by the company – and concerns around Bitfinex, bitcoin prices reacted.

 

Bitcoin prices diverge across exchanges

One hour after initial news articles broke, bitcoin prices began declining. While prices declined across all exchanges, exchanges with bitcoin-tether pairs saw a modest bid for bitcoin. In the figure below we diagram bitcoin price discrepancies across various exchanges. Binance, which does not offer US dollar trading, saw bitcoin prices trade at a premium relative to other exchanges, such as Coinbase, which offer US dollar pairs. In part, this is likely the result of traders exiting tether and bidding bitcoin up. Despite the irregularities in prices at differing exchanges, TradeBlock’s bitcoin XBX index (highlighted in red in the following figure) maintained a steady reference rate as designed.

Figure 1: Bitcoin Prices Diverge Across Exchanges

Bitcoin Prices Diverge Across Exchanges

Data for chart sourced from the TradeBlock Professional Platform

 

Tether unpegs from the US dollar

Tether prices on Kraken and Bitfinex, which list a USD/USDT market, began declining after news reports were published; this is not the first time Tether has come unpegged. In October 2018 Tether prices declined after fears surfaced that Tether had solvency concerns — the asset, however, quickly recovered over the week to resume its peg to the US dollar. Interestingly, given the recent court documents, it is apparent that during scares in October 2018 Tether stablecoins were fully backed by US dollars. However, by December 2018 this was no longer the case.

In Figure 2 below we diagram Tether prices prior to and soon after reports surfaced that the NYAG was suing Tether and Bitfinex. While Tether prices declined against the US dollar, the declines were somewhat limited as USDT traded down to just over 98 cents on the dollar.

Figure 2: Tether Prices Decline Against the US Dollar

Tether Prices Decline Against the US Dollar

Data for chart sourced from the TradeBlock Professional Platform

 

Trading volumes rise considerably

Throughout this time period bitcoin trading volumes increased considerably, as traders entered and exited positions. In the figure below we diagram bitcoin trading volume, at various exchanges, over a 1.5 hour period. As shown, Binance, followed by Bitfinex, saw the largest trading volume.

Figure 3: Bitcoin Trading Volume Soars

Bitcoin Trading Volume Soars

Data for chart sourced from the TradeBlock Professional Platform

 

Bitcoin price crashes on Kraken five hours prior to Bitfinex/Tether news

On April 25th the majority of headlines in the digital currency space surrounded Bitfinex/Tether concerns. However, five hours prior to the first article reporting the NYAG’s suit, bitcoin prices experienced a sudden crash on the Kraken exchange; bitcoin traded down to $4,357 per coin on Kraken, declining 20%.

In the figure below we diagram bitcoin trading volume and prices for a series of trades executed on Kraken, during this period of time.

Figure 4: Bitcoin Trade Volume and Prices on Kraken

Data for chart sourced from the TradeBlock Professional Platform

As shown in the figure above, a considerable number of trades were executed beginning at 12:15 p.m. ET on April 25th. This heightened trading activity occurred over 10 seconds, during which prices declined from $5,465 a coin to $4,357. As a frame of reference, TradeBlock’s XBX bitcoin index ranged from $5,465 to $5,466 during this same period. The decline in bitcoin prices at Kraken did not persist, as prices modestly recovered rising back to $5,467 (inline with the XBX index) after 10 seconds.

 

Broader market remains unchanged during crash at Kraken

While other large exchanges saw relatively unchanged prices during this period, this sudden and momentary decline in prices was localized to the Kraken exchange. In the figure below we diagram trades executed across various exchanges during the crash at Kraken.

Figure 5: Bitcoin Prices on Kraken Diverge from Broader Market

Bitcoin Prices on Kraken Diverge from Broader Market

Data for chart sourced from the TradeBlock Professional Platform

We plotted a similar figure to the one above, but on a narrower time scale, to highlight price points and volumes of executed trades at Kraken in comparison to other exchanges at a more granular level. In Figure 6 below we diagram price divergences and heightened volume at Kraken relative to the broader market.

Figure 6: Price and Volume Divergence at Kraken

Price and Volume Divergence at Kraken

Data for chart sourced from the TradeBlock Professional Platform

As prices at Kraken began diverging from the broader market, TradeBlock’s XBX Index began de-weighting Kraken price contributions for the index reference rate calculation. TradeBlock’s Index algorithms are designed to de-weight contributing prices from exchanges that are experiencing momentary irregularities and anomalies. As shown in the figure below, TradeBlock’s XBX Index adjusted weightings from the other constituent exchanges while Kraken (grey shaded area) was de-weighted during this period — falling from more than 20% weighting to 0%.

Figure 7: TradeBlock XBX Index De-weights Kraken during Irregular Period

TradeBlock XBX Index De-weights Kraken during Irregular Period

Data for chart sourced from the TradeBlock Professional Platform

In Figure 8 below we diagram cumulative trading volume at Kraken during a 30-minute window in which the crash occurred. The area shaded in light red represents the ten-second period in which the price crashed, before recovering.

Figure 8: Cumulative Bitcoin Trading Volume on Kraken Over Time

Data for chart sourced from the TradeBlock Professional Platform

While it is difficult to ascertain the cause of the price move on Kraken, trading behavior on the exchange suggests a market order of around 1,600 bitcoin drove prices down as the order book was filled. After the order was complete, bidding activity drove prices back inline with the broader market and TradeBlock’s XBX Index.

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