BFX Swaps Volume: Like If Prospectors Rented Shovels.
It’s now July 24th 2014, which some redditors believed was a monumental day upon which Bitcoin was supposed to reach yet another all-time high as part of a “bubble cycle.”
Now we have a situation where those who have been actively buying Bitcoin looking for price increases must face either holding on to a weakening investment, or sell it before it dips too far. Those who do the latter may opt to sell now in the hopes that they’ll buy back in at a cheaper price later - the definition of shorting. So what does this mean for Bitfinex lenders who have been lending out “swaps” of USD to traders looking to buy Bitcoin? Why they lend out “swaps” of Bitcoin for traders looking to sell, of course!
The Shorter Explanation: #
Bitcoin price falls, Bitfinex lenders move to lend more XBT (and less USD) to traders who are looking to short it. Make sense?
The Longer Explanation: #
Between January 2014 and today, Bitcoin has been on a slow climb, crawling back up toward its $1000+USD all-time high, but in the last few weeks we’ve seen it taper off and stagnate. Now, the slow bull trend has turned into a period of uncertainty, and the price slips southward. This leaves traders and lenders alike to re-evaluate their actions in the market. Most get in because Bitcoin increases in value over time - but what do they do when that is no longer the case?
Some choose to short it, which is to say that they sell what Bitcoin they have in the hopes that the price falls to a more favourable buy-in entry point, and will resume its rise thereafter. This happens a lot with big worrisome news bites (the Silk Road bust last October, the US government hearing on Bitcoin last November) where the price dives for a short while, then over time regains its lost ground. This makes for a great opportunity to get more Bitcoin in the long-run, if you time it correctly.
So where does Bitfinex and lending come into play?
Margin trading, of course. Where the average trader uses their money to trade and hopefully make gains by playing the market, margin traders borrow others’ money to leverage their trades in the hopes of making way more money than if they had only traded using their own. And just as margin traders can borrow USD to leverage long positions in an exciting bull market, they can borrow Bitcoin to leverage their short positions in a blood-running-in-the-streets bear market.
That’s what we’re seeing right now:
Source: Highcharts via Bfxdata.com.
Notice the falling blue line at the far right edge of the chart. That’s what we’re focusing on.
The BTCUSD price (blue) is falling right now, and the total number of USD borrowed “swaps” (green) is dipping along with it. Naturally, this makes sense: traders borrow USD when they believe the Bitcoin market to be bullish, and borrow much less when it goes bearish. The uptick in the XBT swaps (red) is a natural reaction of lenders looking to make money in a bear market because those lenders who are on the ball have moved their money from USD into XBT to lend it out to margin traders looking to short.
In the end, all this means that lenders are watching the behaviour of traders for money-making opportunities, while the traders are watching the price movement for money-making opportunities. Like shopkeepers loaning out shovels to prospectors digging for gold, except there’s interest charged on the shovels. And in the case of today’s bearish market behaviour, the shopkeepers are offering fewer shovels because people are now looking to sell their gold rather than hoard it.
TL;DR: Look at the chart, see how the green and red lines are switching places as the blue line trends downward. The lenders are following the traders who are following the trend, and there is money to be made by doing so. #
Thanks for reading! Discussion as always on /r/bitcoinmarkets.
- Footnote: In case you’re not familiar with Bitcoin’s history and are trying to make sense of this post, Bitcoin has historically risen in value, generally speaking. (It’s actually much more like a rollercoaster, lots of up-‘n-downs.) It peaked north of $1000USD in November of 2013, and now sits around $600USD, so obviously it rose then fell. Between January 2014 and today, it has been on a slow climb, crawling back up toward its November 2013 value, but in the last few weeks we’ve seen it taper off and stagnate. Now, the slow bull trend has turned into a period of uncertainty, and the price slips southward. As a result, traders on exchanges like Bitfinex are selling more Bitcoin in the hopes of buying more at a cheaper price, and lenders on these same exchanges are offering more Bitcoin for margin traders to sell. The lenders are following the traders who are following the trend.*
Glossary
Bitfinex: Exchange on which users can trade on margin, or users can lend out USD or XBT to those margin traders.
Swap: Functionally, a loan of money (either USD or XBT swaps). The term is used by Bitfinex because the swaps are not a loan in the traditional sense; the money can only be used to trade on margin, not to move off the exchange for other uses.
Short: Sell Bitcoin (or another security) with the expectation you’ll buy more later when the price falls further than it already has. This assumes that the price will then, after buying back in, rise once more.
Long: Buy Bitcoin (or another security) with the expectation it will rise in price.