The crypto market is often unpredictable, making it difficult for investors to anticipate price movements around events. Last week’s SEC action against Binance and Coinbase was a perfect example of this. What we saw last week in the crypto market after the U.S. Securities and Exchange Commission (SEC) took action against Binance and Coinbase was a perfect example, said CoinDesk Deputy Editor-in-Chief Nick Baker. To better understand the market’s reaction, it’s important to consider market expectations and related positioning.
Investor positioning can be thought of as passengers on a boat. If everyone is spread out, one passenger moving from one side to another won’t have much of an impact. However, if everyone is on one side and someone moves to the other, it will have an outsized impact on the net balance. Looking into the regulated futures market positioning data can help us determine what actions investors have taken to align with their market views.
The difference in market reaction between Binance and Coinbase could be related to events that were less and more priced-in, respectively. Additional regulatory action against Coinbase was probably more certain than against Binance, as the firm had already received a Wells Notice. This could explain the broad market sell-off following the new allegations against Binance, but a rebound following the case filed against Coinbase soon after.
Positioning alongside investor deleveraging dynamics can also help explain relief rallies. Leveraged money managers are more likely to have unhedged positions, and their positioning can be seen as a contrarian indicator. Currently, both bitcoin (BTC) and ether (ETH) futures net positioning for leveraged money managers are net short and are at or near one-year lows, which confirms the relatively bearish expectations for both tokens and, by proxy, the greater crypto market.
George Soros’ concept of reflexivity within financial markets can also explain the emergence of price trends that can become self-fulfilling over the short run and self-correcting over the longer term. Last week’s regulatory headlines provided us with a real-world case study in highlighting the importance of market expectations and positioning in providing the setup for event price moves.