A few hours ago, the price of the Bitcoin and other cryptocurrencies underwent a rare massive upward explosion. Within less than an hour, BTCUSD went from below $4200 – where it was slowly growing in many days from a relatively stable plateau of $4000 – up to $5100+ or so, before returning to $4700 at this moment. In the most volatile moments, the spreads were huge and the price was jumping by $50 up and down thrice a second.
The "hockey stick graph" of the Bitcoin price looks extremely unnatural. After days in which the price only changes by some $10 a day, the price could generate a change of almost $1,000 in less than one hour. This discrepancy shows that there's certainly no reliable "order of magnitude estimate of the volatility per unit time" that you could reasonably use in any safe enough planning.
The sudden, unnatural spike had some reasons that are known. In particular, a Bitcoin website reported hours before the spike that some huge volatility was coming. That's what I call a remarkably successful prediction although I am still a bit uncertain whether the success was much more than good luck.
At any rate, they talked about the $4200 resistance area. Once breached, the selling orders could have become rare, opening the room for a huge appreciation. In the jargon of the climate cataclysmology, $4200 was the true tipping point.
Another part of the story was unquestionably some short squeeze. In particular, Bitmex – an exchange – allows leveraged long and short positions. (Bitfinex could have been the key exchange, too – I am not too familiar with it.) I think that by volumes, Bitmex still safely beats the professional Bitcoin futures markets, CME and CBOE (and perhaps a few more at this moment). The sufficiently leveraged short positions were burned. I believe that CME and CBOE are less leveraged so the spike wasn't enough for a significant amount of margin calls there.
According to what I can see, short positions worth some $400 million were closed at Bitmex when the Bitcoin price went up. It's a lot of money relatively to the daily trading volumes – it is really comparable to 10% the daily trading volume and appears within minutes and on one side of the trade. Could there have been a simple "stretched spring" that made the Bitcoin price skyrocket because of the shortsellers' margin calls, even without a significant activity by someone else?
It's possible. When the leveraged positions are large and dense enough – relatively to the actual realtime demand and supply (and don't forget that 95% of the reported trading activity was estimated to be fake) – this kind of an unavoidable short squeeze may occur. I still tend to think that a trader with a lot of money and a concentrated "intent" had to be a part of the story. In fact, it looks rather plausible to me – although I have no hard evidence – that the required money was pumped into the Bitcoin by a rich enough Bitcoin zealot who just deliberately wanted to harm some shortsellers, pretty much regardless of his expected profit or loss.
So "a single malicious Bitcoin zealot plus the short squeeze" is my working model for this particular event. Assuming that it's a qualitatively plausible model, I would still love to know how much money was spent by the "activist trader" – or the ratio of his or her investments and the wrecked short positions. As the daily trading of the cryptocurrencies became pretty much pointless, the ability of the "short squeeze" events to brutally change the price has grown. It's sort of ironic: the more stable the Bitcoin price was, the less "real trading" took place, and therefore the greater potential there was for a really huge explosion of the volatility.
There are also long leveraged positions, probably many more of them, so the reverse "long squeeze" scenario may occur, too. Note that in the trading of stocks, "long squeeze" is far less common than "short squeeze" because the shortselling counterparty is legally obliged to accept the payment in stocks. I think that this asymmetry doesn't exist in the Bitmex Bitcoin trading.
The "short squeeze" has acted as a positive feedback or an amplifier – and probably a very strong one, indeed. But if it's true that there was still a concentrated effort to start the rocket, one needs a very different thinking to "want" to be a part of such a potential financial system. A rich man's click in the balls has probably caused a 20% change of the Bitcoin price in an hour. Do you really want your financial planning to depend on this unknown rich man's clicks in the balls? Clicks that are pretty much unpredictable by definition? It may be a source of excitement – and ecstasy if your positions have the right signs at the right moments – but otherwise it's just scary.
And again, yes, I really do believe that while some people are just trying to seek profit, there are many people who are primarily driven by some ideological motivations. Although 1/2 of the jump to the local maximum has already faded away, the person who has paid for this stunt – and rather likely, who has lost some money – may think that he has achieved something amazing: throwing millions of dollars to the trash bin for making a physically meaningless number (a function of time) much less constant than it was in recent days or months. And he's harmed some ideological enemies who – incorrectly – assumed that such an explosion of volatility was extremely unlikely. But within that community, such a wasteful stunt is considered a great, heroic act.
More generally, people are increasingly spending money for silly things – and they are being pushed to do so and celebrate such acts.