The ability to anticipate price movements and events is one of the most challenging aspects of investment. Last week, the U.S. Securities and Exchange Commission took action against Binance and Coinbase. This was an excellent example.

How do you explain, in particular, the market’s sell-off after the allegations were made against Binance? But the rebound that followed the filing of the lawsuit against Coinbase (the largest U.S. Exchange) shortly thereafter?

Consideration of market expectations and positioning could help solve (or at the very least, untangle) a part of this puzzle.

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(CoinDesk)

Crypto Market Expectations

Coinbase’s regulatory action was more likely to be taken than Binance’s, since the latter had already received a Wells Notice. Compare this to the enforcement action taken against Binance. As a company without an official headquarters, it is less clear what the SEC will do. Answer: through their U.S. entity Binance.US. If these expectations were reasonable (with a caveat for ex-post analyses), it would be reasonable to conclude the differences in the market reactions between Binance.US and Coinbase.com was due to events which were “priced in” less or more.

Positioning

We can determine the actions taken by investors to align their views with market conditions using the data from regulated futures markets. Why are we interested in the data and why are regulated markets important? It’s important to know how investors and traders were positioned before the event. There have also been numerous allegations of wash-trading in unregulated markets.

Imagine a boat full of passengers. This is a good model to use when determining investor positioning. A passenger who moves from one side of the boat to the other does not have a big impact on the net balance if everyone is spread across the boat. If everyone is on the same side of the boat, and it’s not capsized, and someone decides that they want to get some fresh air from the other side (and the boat isn’t swaying), this contrarian move can have a large impact on the net system balance. The dynamics of investor deleveraging can also be used to explain relief rallies.

I like to view the data through the eyes of leveraged money manager, rather than asset managers, swap dealer, or any other reportables. They are more likely to hold unhedged position. I view the group’s position as a contrarian indication, since this category of traders are more vulnerable to short squeezes.

CoinDesk - Unknown(CoinDesk)

By analyzing the data (see Figure 2) we can see that the net positions of leveraged money managers for bitcoin (BTC), ether (ETH), and other futures are all net short, and at or near their one-year lows. This confirms the relative bearish outlook for these tokens and the crypto market as a whole. Positioning at these bearish levels makes the market more resilient to bad news. It also increases its sensitivity to positive developments that could flip short positions into positive ones.

George Soros pioneered the concept of market reflexivity, which is reflected in both positioning and expectations. Market reflexivity is the idea that investor behavior and perceptions impact market conditions. This, in turn impacts and shapes investor beliefs and actions. This self-referential, circular feedback loop results in non-linear dynamics of the market as cognitive biases build upon each other and impact investor positioning and market prices. This can explain how price trends can self-correct over time as traders chase the price until they are disappointed by the price correction.

It’s not a good idea for a regulator target two of the biggest exchanges at the same time, but the regulatory headlines of last week provided us with an example of how market expectations and positioning can set the stage for price movements.

Nick Baker Here’s some interesting news:

  • IN HALFT: In April 2024, the reward for mining Bitcoin (BTC) is going to be cut in half. It’s not too early discuss its implications. This CoinDesk article states that the breakeven point of miners’ profitability may shift to around where BTC currently trades. That means either prices will need to rise or miners will need to become more efficient to earn any money. The price increase of BTC in the past has been greater than the impact of halving. The future will reveal what happens to this cycle,” said Kerri Leanglais, chief strategist at bitcoin miner TeraWulf.
  • SHUTTING DDOWN: crypto.com probably is best known for courting the retail market. It does, however, have an institutional business in the United States – at least until June 21. Last week, the company announced that it would close that business. It blamed the “current market environment” for “limited demand.”
  • NEW POLYGON: Polygon is the Ethereum-adjacent Blockchain where transactions can offloaded to speed up processing. has just released its version 2.0 in an attempt to gain a greater share of DeFi (decentralized finance).

Nick Baker is the editor.