Institutional investors and speculators trading large amounts of Bitcoin are using a new method to hide the real sizes of their stores. They do this – often with the silent help of many major exchanges – to reduce the risk of exposing their intentions to the market, be it bullish or bearish, which can lead to unfavorable price movements.
Avi Felman, Head of Trading at BlockTower, took note of such a trade in the last week of December when someone, or possibly an institution, bought a substantial amount of Bitcoin on the US crypto exchange Coinbase. However, the order book only showed a constant bid (buy order) for 20-40 Bitcoin. Essentially, a large quantity was purchased through multiple small orders.
“Someone [sic] (@elonmusk?) has been sitting between 20 and 40 Bitcoin on the Coinbase bid for US $ 26,800 and reloading, ”Felman tweeted on December 31st.
This has wider implications for what happens in the market. That’s because if an institution were to place a large order it would telegraph its position to the rest of the market, which would cause prices to move against it. Smaller orders are essentially tricking the market into thinking that there isn’t much interest at lower price levels, when in fact there is.
With a “reload” or “refill” strategy, a large order is divided into several small batches. For example, a trader who wants to buy 1,000 Bitcoin places a bid (buy order) for 50 and waits for the exchange to do the partial trade, say 45, before replenishing the order to 50. The process is repeated until the original amount (1,000 Bitcoin) is filled.
An institution uses such a process when it is shifting a large amount to the market. as stated by Poland-based security researcher and trader Mateusz Rek (@NullZeroX on Twitter).
According to David Lifchitz, chief investment officer of Paris-based quantitative trading company ExoAlpha, the replenishment strategy is similar to that of “Iceberg Orders,” which breaks a large trade into small blocks of orders that resemble an actual iceberg with a larger mass of ice in it the sea surface.
When a small order is processed, the next is sent to market. The amount in each disclosed batch can vary.
The above data is from the UK APEX: E3, a cloud-based analysis platform for digital assets, shows potential iceberg orders that appeared on Coinbase in the five weeks ending January 7, 2021.
A number of large orders appeared at the same time, but at different prices, a typical iceberg signature. For example, on December 11th at 4:00 UTC, three buy orders for at least 250 Bitcoin each appeared at $ 17,500, $ 17,500 and $ 16,500, respectively. At the time, the cryptocurrency was trading near $ 17,800.
The implementation of these stealth strategies, which help stabilize the market and prevent significant fluctuations, is only possible through algorithms (machine trading). Therefore, most stock exchanges offer support to institutions that want to book iceberg or refill orders.
“Prominent exchanges such as Binance, Coinbase, FTX, Bitfinex and Bitstamp enable algorithmic trading,” Usman Khan, co-founder and CEO of APEX: E3, a cloud-based digital asset analytics platform for retail and institutional investors, told CoinDesk The assumption is that most algae do iceberg deals to minimize information leaks.
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“The software monitors order execution in real time and replenishes orders until the amount specified by the merchant has been bought / sold. The order size can also be set randomly with each refill, ”said Rek.
However, discerning traders can track down iceberg snoops or replenish orders by looking for a series of limit trades (an order to buy or sell bitcoin at a certain price or better) that constantly appear in the order book. Because of this, institutions do not rely on a single trading platform and execute the iceberg across multiple exchanges to avoid slipping.
“Usually, the more fragments are randomly distributed between exchanges in time and size, but according to the available liquidity, the better the execution,” said Lifoitz of ExoAlpha, “and the less the likelihood that the major order can be prayed to others Traders who will try to take advantage of this. “