Bitcoin, the world's largest cryptocurrency by market capitalization, finally broke through the $30,000 price level after a ten-month resistance level. The much-awaited price gain ended a twelve-day period of extremely low volatility, which saw the price hovering close to $28,200. The 6.5% rally on April 10, 2023, has given the bulls confidence that the bear market has officially ended, especially considering the fact that Bitcoin's price has gained 82% year-to-date.
One interesting aspect of this rally is that Bitcoin's decoupling from traditional markets has been confirmed. On April 10, the S&P 500 index presented a mere 0.1% gain, and West Texas Intermediate (WTI) oil traded down 1.2%, while Bitcoin gained 6.5%. Bitcoin traders are likely anticipating the Federal Reserve's interest rate policy to reverse sooner than later.
Stagflation risk could be behind the decoupling. Higher interest rates make fixed-income investments more attractive, while businesses and families face additional costs to refinance their debts. The reversal of the U.S. central bank's recent tightening movement is deemed bullish for risk assets. However, the fear of stagflation – a period of increased inflation and negative economic growth – would be the worst-case scenario for the stock market.
The U.S. treasuries market suggests a 76% chance that the Federal Reserve will bolster the benchmark by 0.25% on April 29. There's also the added uncertainty of the banking crisis's impact on the sector, with JPMorgan Chase, Wells Fargo, and Citigroup scheduled to report first-quarter results on Friday.
Bitcoin's rally above $30,000 could be the first evidence of a shift in investors' perception from a risk market proxy to a scarce digital asset that might benefit from a period of inflation pressure and weak economic growth.
Two critical factors will determine whether the rally is sustainable: the high leverage usage increasing the odds of forced liquidations during normal price fluctuations, and whether or not pro traders are pricing higher odds of a market downturn using options instruments.
Bitcoin futures show modest improvement. Bitcoin quarterly futures are popular among whales and arbitrage desks. However, these fixed-month contracts typically trade at a slight premium to spot markets, indicating that sellers are asking for more money to delay settlement. As a result, futures contracts in healthy markets should trade at a 5-to-10% annualized premium – a situation known as contango, which is not unique to crypto markets.
Bitcoin traders have been cautious in the past few weeks, and even with the recent breakout above $30,000, there has been no surge in demand for leverage longs. However, the Bitcoin futures premium has slightly improved from its recent low of 3% on April 8 to its current level of 4.2%. This suggests that buyers are not using excessive leverage, and there is effective demand on regular spot markets, which is healthy for the market.
Bitcoin option traders remain neutral. Traders should also analyze options markets to understand whether the recent correction has caused investors to become more optimistic. The 25% delta skew is a telling sign when arbitrage desks and market makers overcharge for upside or downside protection.
Currently, the options delta 25% skew has shifted from a balanced demand between call and put options on April 9 to a modest 4% discount for protective puts on April 10. While this indicates a slight increase in confidence, it is not enough to break the 7% threshold for moderate bullishness.
In essence, Bitcoin options and futures markets suggest that pro traders are slightly more confident, but not excessively optimistic. The initial decoupling of Bitcoin from traditional markets is a promising sign, as investors are showing confidence that the crypto market will benefit from higher inflationary pressure. Moreover, it highlights traders' belief that the Federal Reserve can no longer continue raising interest rates.
However, it is worth noting that the rally in Bitcoin above the $30,000 level could be the first evidence of a shift in investor perception from a risk market proxy to a scarce digital asset. The risk market proxy refers to assets that are viewed as a gauge of overall market risk, such as stocks, while scarce digital assets, like Bitcoin, are seen as a hedge against inflation and economic uncertainty.
If Bitcoin continues to decouple from traditional markets, it could attract new investors seeking to diversify their portfolios and hedge against inflationary pressures. Additionally, the fact that Bitcoin has gained 82% year-to-date is a positive sign that the bear market may have officially ended, which could further increase investor confidence in the asset.
However, there are still two critical factors that will determine whether the rally is sustainable. Firstly, the high leverage usage increases the odds of forced liquidations during normal price fluctuations. This means that if the market experiences a sudden price drop, leveraged traders may be forced to sell their positions, leading to further price declines.
Secondly, it is important to monitor whether professional traders are pricing higher odds of a market downturn using options instruments. If traders anticipate a Bitcoin price drop, the skew metric will rise above 7%, indicating a bearish sentiment.
In conclusion, the recent rally in Bitcoin above the $30,000 level is a positive sign that the bear market may have officially ended, and that Bitcoin could be decoupling from traditional markets. However, it is important to monitor the market's high leverage usage and professional traders' sentiment using options instruments to determine whether the rally is sustainable. Additionally, with the Federal Reserve's interest rate policy remaining uncertain and the risk of stagflation, Bitcoin's status as a scarce digital asset could continue to attract investors seeking to hedge against inflation and economic uncertainty.