Bitcoin sits on a ‘powder keg of volatility’ as bulls and bears vie for next moves
Are Bitcoin (BTC-USD) better days behind? It depends on who is requested.
For most of January, the digital coin hovered in a narrow $40,000-$48,000 range, and well below last year’s highs after a sharp year-end selloff. Investors believe the relatively stable trading band masks the risk of wilder swings triggered by a short squeeze, but the jury is still out on whether Bitcoin has established a base at current levels.
Cryptocurrencies have been highly correlated with risk-sensitive assets, falling in sympathy with volatile Wall Street stocks: During Wednesday’s session, the Nasdaq Composite reached correction territory and dragged digital tokens lower , with Bitcoin pinned below $42,000.
However, the bulls remain convinced that the currency has more potential upside than downside.
“It’s now a very resilient asset class,” LMAX Group CEO David Mercer told Yahoo Finance Live last week. “This selloff is to be expected in what is still a fairly thinly traded and small asset class within a broader capital market.”
Even if Bitcoin pulls back towards $30,000, however, “just the weight of institutional money coming in, and if you talk to anyone, every banker, every asset manager has a strategy for crypto. and long term you should just see the price pop from here.”
The Federal Reserve’s widely telegraphed plans to raise interest rates to stave off inflation haven’t helped. With the central bank aiming to withdraw the huge sums of liquidity injected by its policies in times of crisis – which have fueled inflation and undermined the purchasing power of fiat money – the short-term “macro context” seems less certain. for Bitcoin, according to Chris Gatta, president of 3iQ Digital Assets US.
“There is this possibility of a short squeeze, but there could always be more pain,” Gatta told Yahoo Finance, referring to the temporary bounce an asset can get when bearish investors are forced to cover dips. short positions during price action.
“Usually when Bitcoin enters these very tight trading windows like right now, the breakout is quite violent whether it’s upside or not,” he added.
In cryptocurrency markets, which Bitcoin still dominates, such a move is almost always exaggerated by speculative efforts in derivatives. On Monday, blockchain analytics platform Glassnode called this current momentum a “powder barrel of short-term volatility.”
According to Glassnode, funding rates for BTC perpetual futures — a derivatives swap with no expiry date — have been moving into negative territory in recent weeks. Negative funding rates indicate that the majority of trading momentum is biased in favor of short sellers.
Funding is starting to turn bullish on some exchanges like Binance, but open interest for perpetual futures is now above 250 BTC. This level that has happened four other times in the past year, and culminated with a major boost in the market value of Bitcoin.
From May to July (the last time BTC perpetual futures funding rates moved into negative territory), Bitcoin rose from $30,000 to $47,000. Of course, other factors were in play during this time and may not boost the token this time around.
“We are still waiting to see [those] manifest in today’s market,” said Will McEvoy, Digital Assets Researcher at Fundstrat.
Last summer’s rally came after weeks of negative funding from short sellers. Yet, according to McEvoy, another key ingredient turned out to be increased buying of BTC on spot market exchanges, pushing the momentum to the bulls.
To see a similar dynamic, McEvoy told Yahoo Finance that the price of BTC needs to “keep falling” to reflect overall market sentiment, while funding rates need to stay negative for longer.
In this scenario, a sharp change in buyer demand – whether from sentiment or larger institutional players such as accumulation by crypto exchanges – could catch short sellers off guard, forcing them to cover their positions. positions.
“This may be something to watch especially for Ethereum which is approaching multi-month high short positions on Bitfinex,” McEvoy added. After a small bounce, ether (ETH-USD) still registers a loss of more than 7% in the last seven days.
On the other hand, Phillip Swift, a bitcoin trader and founder of bitcoin data dashboard Lookintobitcoin.com, said the short squeeze outlook may already have “become too commonplace…which naturally makes it less likely to materialize”.
He cited the number of active BTC addresses, or wallets, against its 28-day price change – as well as Bitcoin’s wayward score of 24 on the Fear and Greed Index. Swift expects a “bounce back” in price over the next week, arguing that “Bitcoin is at or near lows.”
If this thesis turns out to be correct, the currency could test $49,000 this week, according to Yuya Hasegawa, market analyst at Bitbank, a Japan-based exchange. However, he insisted that “it will probably be another anti-climactic week”.
David Hollerith covers cryptocurrency for Yahoo Finance. follow him @dshollers.
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