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Last week, as anticipated in these pages, Bitcoin fell to an important level from which the crazy run up to $1100 was launched. On a few of days of extraordinarily high volume, BTC/USD dropped around 20 percent in the first days of last week to a low around $170 before recovering.

There has been a great deal of analysis attempting to explain why BTC fell so far so fast, but to me, as somebody whose background is in interbank foreign exchange, it had all of the hallmarks of a classic stop-loss squeeze, and that should be a cause for concern.

BTC/USD had bounced off of the $250 level once, but when it fell back there last Monday, little support was evident. Instead, amid heavy selling across the exchanges, the price crashed through that level and by Tuesday had also broken $200. With more pure traders joining the ranks of true believers and long only speculators who previously populated the Bitcoin exchanges, such exaggerated moves are to be expected around what are perceived as major levels. The size and speed of this move, however, has me worried.

If a level of support is obvious, as both the $200 and $250 levels were in BTC/USD, it attracts certain types of trades. There are those that seek to profit from the expected bounce and place buy orders close to the level. It is those orders that create the support in the first place. Then there are the stop losses. Floor traders and the denizens of dealing rooms know that most people will place stop losses either close to support levels or just below a round number. When the support is a round number, there will obviously be double the effect.

Now consider again those buy orders that make up the support. They are short term by nature and therefore will probably have their own attendant stop loss orders once filled. If the buyers are looking just for a quick bounce off of a level and a 10-15 percent profit they are extremely likely to set stop losses close to the support to protect against a break. With all of those stop loss orders sitting just behind a support level, pushing through that support to trigger them is just too tempting a proposition for most traders. Once the stops are triggered and panic is around the original seller simply provides convenient bids for the stops that he has triggered and banks a nice profit.

I know, because I have been that guy. Back in the 1980s when I started in Forex, squeezes like that were extremely common, whether done alone or in tandem with another trader. We would push the market down to trigger our own customers’ stops at times; it was just considered normal operating procedure by traders. It happens far less now. Stronger regulations about market rigging have removed the possibility of collusion, and the sheer size of the modern Forex market has made it difficult, if not impossible, for somebody to crash a level on their own in most traded currencies. The Bitcoin market, however, is another story. The reason is simple, but it does hint at a problem that Bitcoin will have in the future unless the price really jumps: The market just isn't big enough to protect itself.

The concept of a deflationary currency with a preset, limited supply is what appeals to many about Bitcoin. That concept is at the very heart of the idea, but if the big boy interbank Forex traders really are sniffing around Bitcoin, as many have suggested, then it also poses a major problem. Even when mining is completed and all Bitcoin are in circulation, at a $200 exchange rate, that represents a market cap of $4.2 billion. That is a big number, but to a forex market that turned over $5.3 trillion each day in 2013 it is a drop in the ocean. BTC will be just too easy to push around.

The problem that the Bitcoin community faces is that the best solution to that problem is an extremely unpalatable one to most; regulation of some kind to protect what is still a very young market before the traders kill it. Oh, and if you think that Forex traders won’t kill a market in pursuit of short term profit, then you haven’t met many.

It could, of course, be that I am wrong. The massive drop could have been the result of worry about the problems at Bitstamp or some other concern. In general though, if something looks like a squeeze, walks like a squeeze and quacks like a squeeze, then it’s a squeeze. It could also be that it was just a couple of small traders who saw the same opportunity and got lucky rather than evidence of the presence of a large trading desk. For the sake of the BTC market, I certainly hope that is the case.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.