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‘The Sunday effect’: Why does crypto tend to crash on weekends?

June 4, 2021, 12:30 AM UTC

Cryptocurrencies don’t take any days off.

Digital currencies aren’t tied to any regulatory authority, and they freely trades outside standard hours for equity exchanges—giving investors the prerogative to buy or sell it whenever they please.

A potential drawback: Crypto can experience enormous market swings on the weekends, or even holidays. In mid-April, 10% of Bitcoin’s value was razed over one weekend.

In general, Bitcoin returns have been lower on the weekends in 2021 than they have been intraweek. The average return for Bitcoin this year has been 0.29% on weekdays, compared to 0.17% on weekends, according to data from investment research fintech YCharts. But nearly half of the weekends, Bitcoin prices have ended up higher at market open Monday than they were on Friday, according to data collected by Eaglebrook Advisors, a crypto asset manager for financial advisors.

Even this past holiday weekend, which some investors dreaded would chisel away returns even further after an arduous two weeks, delivered a slight boost to Bitcoin’s value. The coin was trading at $36,642 on June 1, up more than $950 from that Friday.

Whether Bitcoin is spiking or seeing a drawdown, here are some factors that seem to be swinging the prices on weekends, according to crypto experts.

Traders take a day off

Carol Alexander, a finance professor who conducts cryptocurrency research at the University of Sussex, has recently observed a trend she calls “the Sunday effect.”

U.S. asset managers, who she has argued are instrumental in dictating the price of cryptocurrencies, nearly always take Sundays off, even if they occasionally trade on Saturdays. Without their participation in the Bitcoin market on Sundays, prices tend to fall, she says.

“Just since April—Monday and Sunday returns [for Bitcoin] have been really, really, really different,” Alexander says.

The crypto market has changed dynamically as more institutional players have entered the market since mid-2020, Alexander says. That’s when the Office of the Comptroller of the Currency formally allowed chartered banks and thrifts to provide custody of crypto assets. 

Some of these U.S. trading companies engage in market manipulation, such as “spoofing” (the practice of putting large orders on the market without the intention of executing them) to inflate prices. “It happens all the time,” Alexander says.

Liquidity

The Bitcoin market is dominated by a few enormous players. Bloomberg reports that about 2% of anonymous accounts hold 95% of Bitcoin. Any move from these giants, often called whales, can have a “material impact” on Bitcoin’s price, according to Roberto Talamas, an analyst at crypto research company Messari.

This liquidity issue can be compounded on weekends—when fewer investors tend to be making trades. U.S. investors are only able to trade with money already in their accounts, as wiring more money into an account requires participation of banks, custodians and other financial institutions, which don’t do business on weekends.

The lack of liquidity is “a big reason why you’re seeing some of the drawdown,” says Chris King, CEO of Eaglebrook Advisors.

No matter what day you’re buying or selling, the Bitcoin market is a dislocated one, with trading taking place on and off “so many isolated exchanges,” according to Talamas.

Late-week negative headlines 

Bitcoin is “still very nascent,” Talamas says, making it very sensitive to negative news. 

Two weeks ago, the digital currency crashed following Elon Musk’s tweet that Tesla had suspended vehicle sales for Bitcoin, and later China’s announcement that it was cracking down on Bitcoin mining.

When headlines such as these emerge late in the week, they can have a devastating impact on Bitcoin returns, particularly because some investors will be late to read the news.

“If there’s negative news that comes out on Thursday and Friday, sometimes that will be reflected on the weekend,” King says.

Volatility

Finally, there’s the issue of leverage—on every day of the week.

Many investors borrow funds from their brokerage to pay for Bitcoin. Should the price fall, brokerages request money back in what is referred to as a “margin call.” If investors can’t post more funds into their accounts to cover this request, their positions will be liquidated, which draws down the price for Bitcoin even further.

“You just have this downward cycle in the price,” Messari’s Talamas says. 

The most recent Bitcoin crash in May—where the price fell more than 30%, leading to about $8 billion in liquidations—was “magnified for that reason,” Talamas says.

Bottom line: Not only do Bitcoin investors have to deal with stomach-churning volatility during the week, they apparently can’t take the weekends off, either.

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