Bitcoin Price Analysis: Wash Trading and Rising Volume

In recent weeks there has been noticeably more volume on two of the major bitcoin exchanges: Bitstamp OKcoin.  The two charts below show the big increase in volume with very little price movement on both of these exchanges.

After speaking with self proclaimed “degenerate gambler” and one of the most respected bitcoin  traders of the space, BTCVIX, most of this volume appears to be wash trading.  According to BTCVIX, “And now we are even seeing some of this interest wane as I believe the ramping up volume washing bot activity is the Casino trying to keep the lights flashing and the sounds blasting so that we keep wanting to play the game.” More can be found on this subject:

This is done to fake liquidity and volume. What happens is large orders are bought and sold of almost the same amount very quickly. This increases churn but affects price very little.  Below are some charts showing what is considered to be wash trading.

Bitcoin has been stuck in a very tight range (under $20) since the beginning of September. While this column has commented for months on the lack of volume on any upside moves and how disappointing that is, this type of volume increase can be a self fulfilling prophecy.  Volume generally precedes price and while it is only one factor, there are reasons to be bullish here. 

As the above chart shows the price has broke above the 50 day EMA, which could set up for a move to test big resistance in the $255-$260 range. Not only that but the Bollinger Bands and the Directional Movement Index (DMI) have both tightened to levels not seen in quite a while. What this means is that a big volatile move should be expected, and the bias is to the upside.  The RSI is also positively diverging from price which is bullish. The MACD just had a bullish crossover as well. Finally On Balance Volume (OBV) is at elevated levels and while this might be do to wash trading, it’s bullish as well.

Based on the weight of the evidence, bitcoin looks poised to experience an upside breakout. If this happens the first level that needs to be broken is $260, for a sustained.  While there are many key resistance levels before $300, if price gets there and fails again, that would be extremely bearish.

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