Following its failure to break over the $45,000 obstacle on February 16, the price of Bitcoin (BTC) has dropped by 23% in the last eight days. The $34,300 low on February 24 occurred shortly after the Russian-Ukraine war erupted, causing a major sell-off in risk assets.
While Bitcoin hit a 30-day low, Asian stocks were also reacting to the worsening conditions, as indicated by Hong Kong’s Hang Seng index falling 3.5 percent and the Nikkei hitting a 15-month low.
The first point to address is whether or not cryptocurrencies are overreacting in comparison to other risk assets. Bitcoin’s volatility, at 62 percent each year, is significantly higher than that of traditional markets.
The Russell 2000, a small and mid-cap stock market index in the United States, has a 30 percent yearly volatility. Meanwhile, Chinese equities have a market capitalization of 32 percent, according to the MSCI China index.
Bitcoin, the Hang Seng stock market, and the Russell 2000 Index in the United States all have a strong link. The Federal Reserve’s tightening aims in the United States could be one cause. The monetary authority has sparked a “flight to safety” reaction by limiting bond buybacks and threatening to raise interest rates.
Despite the non-existent returns when adjusted for inflation of 7.5 percent, investors frequently seek safety in cash U.S. dollar positions and Treasury bills. This is particularly true in times of great uncertainty.
Bitcoin futures traders are pessimistic.
Bitcoin derivatives should be monitored to understand how professional traders are positioned. The yearly premium on Bitcoin futures should be between 5% and 12% to compensate traders for “locking in” their money for two to three months until the contract expires.
An annualized premium of more than 12% implies bullishness, while levels below 5% are severely pessimistic. The futures premium fell below 5% on February 9, as illustrated above, indicating a lack of confidence among professional traders.
Although the current rate of 2.5 percent is the lowest since July 20, it marks the end of a 74-day price correction. That occurrence was followed by a 71 percent gain, corroborating the thesis that the futures premium is a backward-looking indication.
On July 20, the correlation between Bitcoin and the Russell 2000 Index was relatively high. However, once BTC began to rally independently of traditional markets, the situation swiftly reversed.
Although the bottom may have been reached, uncertainty might lead to more losses.
The correlation statistic, like the futures premium, is based on past data and should not be used to forecast trend reversals. During times of market turmoil, investors, particularly professional fund managers, tend to shun high-volatility assets.
Understanding market psychology is critical for preventing price movements that are unanticipated. As a result, as long as market participants view Bitcoin to be a hazardous asset, these short-term declines should be the norm rather than the exception.
As a result, it makes reasonable to hold off on predicting a Bitcoin bottom until further decoupling indications emerge.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.
