A Visual Guide To BTC And ETH Price Fluctuations

The crypto market had a shake out. Get it clear, it has crashed. Even if the generic sentiments tend towards a V-shaped recovery, the market can go lower or hang around here for a while. While waiting for a clearer pattern to appear, why not learn something or consider a new perspective?

The concept of “Buyers > Sellers = Higher Prices” and vice versa is quite comprehensible. But there’s a slight difference in crypto because BTC and ETH are used to exchange for other altcoins i.e. they are bought and sold at the same time. Let me start off with a question:

1. If people are buying ETH with Fiat, but also selling ETH for alts, does ETH price go up or down?

It depends which is the dominant action. And that lays the foundation to Crypto Liquidity Trap thesis, which I’ll explain further through diagrams.

Imagine ETH As A Water Tank

Left: When people buy ETH and pump more “water” into the tank, the water level goes up.

Right: When people sell ETH and drain “water” from the tank, the level goes down. This water level corresponds to the price of ETH.

Considering that these are opposing actions, if the inflow is equal to the outflow, the water level and hence prices can stabilise. What we’ve witnessed in crypto for the past couple of months was first a pump, and then most recently a dump. How does that tie in to the diagram?

The pump in ETH is due to a lot more money buying ETH than that selling ETH. That’s to say few people are selling ETH for Fiat and they also prefer holding ETH over Alts, leading to a smaller outflow. And then the crash…

You might have noticed that ETH prices did not drop as hard and fast as other alts. The reason is because while there was a massive outflow of ETH to Fiat, there was also a massive flow of alts to ETH.

There is currently a structural limitation for crypto. As most exchanges have not included the fiat on-ramp (sell fiat for crypto) and off-ramp (sell crypto for fiat) for smaller cap DeFi and ERC20 tokens, bag holders will have to sell these for ETH first if they plan to exit the market.

With the FUD and the big downside pressure, there are a lot of panicking capital trying to move out of crypto. So people are not just trying to sell their ETH to fiat, they are also selling their alts to ETH and then to fiat. This effect can be similarly applied to and observed with Bitcoin (or wBTC).

Having said that, crypto exchanges today generally offer more fiat on and off-ramp options than in 2017. So it can be argued that this effect may not be as pronounced before. However, I noted a phenomenon that could lead to a similar if not greater effect, which I term the Crypto Liquidity Trap.

Up till now, we’ve only considered buying and selling demand without consideration for the supply of the tokens. Compared to the 2017 run, we now have a lot of tokens being locked up for lending to different protocols and exchanges, and also for yield farming. So how has it changed?

*To be clear, there was a lot of locked up ETH on ICO projects in 2017, but the level of locking up from staking and wrapped tokens today is unprecedented.

Imagine the same water tank, but now there is a layer of “frozen” tokens as indicated by the black layer. The gates influencing the inflow and outflow works in the same way, but how do you think the water level (or prices) will change because of this phenomenon?

If you’re interested to read an in-depth explanation, I invite you to read this article and share your thoughts. TLDR, there are two key concepts:

1. Locked-up supply increases price volatility i.e. the water level will be more sensitive to the inflow and outflow, so the magnitude and the frequency of price changes will be greater.
2. If and when the locked-up tokens are unlocked i.e. the frozen layer melts, it can change the rate of flow greatly, but it begets yet another question: Under what conditions would people unlock their tokens?

Although I’ve spelt out a clear narrative in my article, it was murky and confusing AF when the market crashed on 19 May. The thesis, while useful to reflect on hindsight, provided little assistance during the lead-up to the crash and the crash itself. It also provides no value in predicting the market moving forward i.e. I can’t tell if it’ll crash further or recover from here.

This is not to render all these useless. For me, this understanding made me appreciate the inflow and outflow of BTC/ETH/USD on exchanges. A week prior to the crash, massive amounts of USDT were moved to exchanges. Days before the crash, tens of thousands of BTC were moved to the exchanges.*

*See How To Orchestrate A BTC Dump if you couldn’t catch the significance of the USDT and BTC moves.

While these moves could well be a “pump fake”, they were signals that warned me to de-risk my positions. Moving forward, we can see that while the total locked-up value has declined in the past two weeks, it can drop further or for all we know, it can rebound from here.

One thing is for sure, I’m hawked on the whale movements because the smart money knows. Ben Lilly also writes a pretty darn good newsletter that hints at these “Pablo moves”. You’ll need some time to go through their work to get the contextual references, but it’ll be worth it.

Invest safe. We’re in for a wild ride.

Source: https://medium.com/@h.ansel/a-visual-guide-to-btc-and-eth-price-fluctuations-e474869f25e4?source=rss——-8—————–cryptocurrency