I’m learning a lot as I become more familiar with talking with the press. Most contacts follow my blogs, or my press releases from the University of Sussex, or just other ideas found elsewhere. But Jessica Mathews of Fortune Magazine came to me with a great new idea of her own about returns on bitcoin being lower at weekends. We talked through a lot things to get the facts right and she followed up quickly with two articles, released on 3 and 4 June.[1]
On 10 June, exactly the same ideas were released in a CBNC report Here’s why cryptocurrency crashes on weekends. I wish the journalist had thought to ask me, because apart from the facts taken straight from Jessica’s articles, there are a number of inaccuracies.
I quote: “One of the reasons for weekend cryptocurrency volatility is there are fewer trades, said Amin Shams, assistant professor of finance at Ohio State University in Columbus, Ohio. “When the volume is low, the same trade size can move prices a lot more,” he said.
Wrong. The chart below exhibits the volume traded on the contract which has the predominant impact on both price and volatility transmissions to other exchanges – the Binance tether perpetual contact. So it is this contract we need to keep our eyes on for both price and volatility leadership. And below the pink chart, in red I show the volume patterns on much the largest bitcoin instrument in terms of open interest, Bybit’s inverse dollar perpetual.
Using data starting 1 Jan and ending 31 May 2021, we group trading volume into 4hr buckets, starting Sunday 00:00 – 04:00 UTC. We average the trading volume for every such interval over the course of this year and the results are shown below.[2]
Since these two exchanges are the main leaders in price discovery and volatility spillovers, the reasons for returns being lower at weekends is not lower trading volume.
Here’s another quote from the CNBC article: “Another reason for weekend price swings may be investors trading cryptocurrency on margin, which is borrowing money from the exchanges to buy more assets, Shams said. When digital currency prices dip below a certain level, traders must repay the loan, known as a “margin call.” But if investors don’t cover the loan, exchanges may sell the digital currency to ensure they receive the borrowed money back. With banks closed over the weekend, some traders may struggle to pay off the borrowed funds because they can’t move money into their accounts, triggering sell-offs from exchanges, Shams said. “That’s going to drop the price further,” he added.
Also wrong. First, most crypto exchanges do not have margin calls, they have auto-liquidations instead. That is, the position is automatically liquidated by the exchange, without notice, if the collateral in the margin account falls below the maintenance margin. Now, let’s look at the pattern of auto-liquidations on these two exchanges. These are measured on the left-hand scale on the graphs below, as a % of open interest.[2]
This shows that most auto-liquidations are on long positions, so they are triggered from unanticipated sharp price falls. Most auto-liquidations happen on Sunday 00:00 – 04:00 but also between 08:00 and 16:00 on Mondays. Saturdays have the lowest volume of auto-liquidations. If auto-liquidations are the reason why returns are lower on weekends, then we should see most liquidations at weekends, not on Mondays.
But does bitcoin actually tend to crash at weekends? No, in fact returns are only marginally lower on average on a Sunday, they hardly ‘crash’ -- as Jessica made clear in her article. To see this, look at the chart at the top of this blog, which exhibits the average return on a Sunday in black, on a Saturday in green and on Monday in blue. Each point in time represents a 52-week moving average of that day’s return.[3]
Sunday returns have been averaging -5bps for the whole of the past year. This is very small in bitcoin terms and not a crash by any means. But there is a consistent pattern of lower returns on Sunday. Monday returns have been averaging 10bps. And Saturday returns used to be negative, on average, but now they are almost the same as Monday returns.
Carol Alexander, 14 June 2021.
[1] https://fortune.com/2021/06/03/why-does-crypto-crash-on-the-weekends-bitcoin-cryptocurrency-markets/ and https://fortune.com/2021/06/04/crypto-etfs-bitcoin-sunday-effect-weekend-crypto-crashes/ [2] Many thanks to Jun Deng of UIBE, Peking for obtaining these data from Coinanalyse and making the chart.
[3] Many thanks to Dimitrios Kletsas for making this Chart. Dimitrois is a student on MSc FinTech, Risk and Investment Analysis at the University of Sussex.