Who's laughing now? (via Shutterstock)
Bitcoin,  Opinion

April Fools’ rally in Bitcoin reminds just how ridiculous crypto markets—and algo trading—can get

Sometimes when comedy becomes a tragedy, it becomes a comedy

It seems everyone has gotten to the bottom of Monday’s rally and—whoddathunkit?—it might have been an April Fools’ Day joke.  Sure, there were a few jokes floating around the cryptoverse but one in particular is suspected to have ignited buy orders and short squeezes.

On Monday, relatively small site called Finance Magnates published a cute little post titled, “SEC Drops the Bomb: Approves Bitcoin ETFs,” with an equally preposterous sub-headline saying “VanEck and Bitwise will be launching Bitcoin ETFs early next month following an emergency meeting the SEC held Saturday.” The piece said that just two days after delaying the ETF, the SEC decided to hold an emergency meeting over the weekend (really, people fell for this) and changed their mind. One of the “experts” quoted in the article was an NYU professor named Violet Baudelaire who is, of course, a character in Lemony Snicket’s A Series of Unfortunate Events.

[READ MORE: Crypto Mom says SEC takes nanny state approach]

It was posted a few times on Reddit with not much fanfare, though it seems some commenters took it seriously. It made the rounds on Facebook, with some pages earnestly reposting it, hoping to gain followers or interaction rates or whatever it is social media people say is important but probably isn’t.  Yet according to Bloomberg—and a few other places—the piece might have been a catalyst to prop up Bitcoin prices, which have been slowly grinding higher for a couple of months now.

Volume on the exchanges have soared in the past 24 hours, with BitMEX, a derivatives market for crypto, leading the charge. According to CoinMarketCap, 24-hour volume in Bitcoin trading as of 10:30 a.m. Eastern Time was $17.4 billion, of which BitMEX was responsible for nearly $4.2 billion. Daily volume has been in a range between $9 billion and $11 billion for nearly a month now.

Part of that volume was what looks to have been a short squeeze on BitMEX to the tune of $500 million:

For review, if a speculator wants to bet that an asset price will fall, they will first borrow that asset—in this case, bitcoins—and sell it into the market. They hope that at a later date, they’ll be able to buy the asset back cheaper and return it to the person or institutions they borrowed it from. However, sometimes if the price works against them, they have to buy it back at a higher price in order to return it on time. If there are a lot of short sellers—or one big short seller—doing this at a time when there are too few available in the market to buy, it creates a “short squeeze” whereby demand outrageously exceeds supply leading to skyrocketing prices. 

What’s more the price of Bitcoin pierced above its 200-day moving average. On the surface, that may not seem significant but for technical analysts—the sort of folks who trust charts more than qualitative information—that’s a big deal.

So did the rally really occur because of an April Fools’ Day gag? That is as of yet undetermined. One reason to suspect not is that the rally occurred several hours after the post and it initially didn’t get the sort of attention one would expect of a market-moving story but instead was cited after the fact.

Algorithmic trading tied to news articles is something that has been around for a while in traditional markets. In fact, back in 2015, this editor reported on a successful options trade immediately executed by a bot when Dow Jones reported that Intel was in talks to buy Altera.

Yet that strategy can cause heartache for investors who depend too much on them. Six years ago this month, stocks suffered a “flash crash” after hackers using AP News’ Twitter account posted that then-President Barack Obama was injured in an explosion at the White House. Share prices quickly recovered but in the interim six minutes, the total market cap lost by S&P 500 companies were as much as $136.5 billion.

Thus applying these strategies to crypto markets—where news sources are questionable, reporters aren’t as well-trained, and investors aren’t as sophisticated—could lead to, say, short squeezes triggered by April Fools’ Day jokes.

Artificial intelligence has its limits, as does the human mind. Language, nuance, and culture can be learned—or programmed—but using them to make instantaneous decisions about a trade can backfire tremendously. On top of that, the fuel tank of hope and greed filled by HODLers and fraudsters scouring message boards and Twitter looking to confirm their biases can easily ignite when intent and trust are lacking.

As of posting time, Bitcoin prices are still hovering above $4,700.

Lawrence Lewitinn, CFA is editor in chief of Modern Consensus. Disclosure: Lewitinn owns no cryptocurrencies in his portfolio.

Subscribe to MODERN CONSENSUS Newsletter