What Caused the Bitcoin Dump on September 5th?
By: Avi Felman
Tags: Cryptocurrency, Bitcoin, Ethereum, Research, Trading

Theory 1: Goldman’s announcement about rolling back a trading desk affected the markets, as reported by multiple headlines.

I’m listing this theory first because many major news outlets reported that the drop was due to the Business Insider article that reported Goldman Sachs was rolling back plans to introduce a trading desk.

However, when you look into the timing of price action, the facts do not corroborate this story. The article was released approximate 30 minutes after the initial 3% drop, and 5 minutes after the second 3% drop of the day. Bitcoin then held steady for the 12 hours following the release of the article and resumed its free fall 12 hours later at 7:30pm EST.

The final nail in the coffin of this theory is the lack of market reversal when it was announced by the Goldman CFO, that the article was “fake news”.

Theory 2: Silk Road Bitcoins were dumped on the market and drove down the price considerably.

A recent Reddit investigation found that a wallet linked to the Silk Road with 111,114 BTC recently started to move it’s holdings for the first time since 2014. Of the holdings, approximately 11,114 BTC was moved to Bitfinex and 4,421 BTC was moved to Binance, indicating an intent to sell on the market.

Judging the overall impact on the market requires a look at the total volumes for the day. The total volume was 55.5k BTC on Bitfinex, and 61.8k BTC on Binance.

The holdings of the Silk Road were of enough substance to drive the price down, as if all holdings were liquidated immediately it would have accounted for more than 10% of the daily volume, which would contribute to significant downwards pressure.

However, it looks as though the BTC/USD contract on BitMEX was the first to go down, which goes against the assumption that dumping on Bitfinex and Binance was the driving factor of the first two large candles.

Although the volume was sufficient, the actual market reaction indicates that the Silk Road address did not spark the dump. Although it may have been further exacerbated by selling from the address, it was not the main cause.

Theory 3: It was a technical breakdown, and large sellers saw an opportunity to crash the price.

This is the most likely event. After 12 days, Bitcoin had posted an almost 20% gain and was slowing down in terms of momentum. RSI had plateaued, volume was trending down, and as mentioned above volatility had collapsed

Three days prior, on September 2nd, we saw a massive uptick in shorts, which was easily swallowed by the market, giving bullish hope to many traders who witnessed the fabled “bull whale of Bitfinex” swallow up sell orders with massive hidden buy walls. You can see in the chart below that the margin shorts didn’t move price, although they did single-handedly prevent a break of resistance.

Following the shorts failure to drive down the price, retail traders began to pile in longs as they felt safe in a seemingly “bullish” market structure.

This piling on of longs set up the market structure to be weaker, as a long squeeze became a real possibility if the price took a turn for the worse.

Of course, that’s exactly what happened, and once the price dropped, these longs were forced underwater. Retail traders will often close positions quickly when in the red, and we saw that effect take place as the dump kept cascading.

The takeaway

This dump was not caused by a singular catalyst and was likely just an issue of market structure flipping from bullish to bearish due to Bitcoin running out of steam, and further exacerbated by large actors taking advantage of retail tendencies.

Often, there are no direct reasons or catalysts for price movement. Especially if attempting to trade, it’s important to explore developments with a critical eye to ensure that you’re teasing out correlation and causation from price movements.