Bitcoin (BTC) faced challenges on Feb. 5 as its price struggled to maintain support at $43,000. This setback occurred after U.S. Federal Reserve Chair Jerome Powell dampened expectations of interest rate cuts in the coming months. The lack of interest from leveraged longs in BTC derivatives markets led to speculation of a potential drop to $40,000.
The drop in Bitcoin’s price can be attributed to the high U.S. interest rates. In a Feb. 4 interview with 60 Minutes, Powell clarified that the central bank needs more assurance that the inflation rate will reach the 2% target before taking action. Although Powell expressed optimism about the economy, stating that it’s “in a good place,” he mentioned the possibility of three quarter-point rate cuts this year based on official projections, depending on the behavior of the job market. However, this contradicted investors’ expectations of interest rate cuts starting in March.
Another factor adding pressure to Bitcoin’s price was an essay by Minneapolis Fed President Neel Kashkari on Feb. 5, suggesting that the monetary authority might take time before reducing interest rates. Kashkari argued that the current monetary policy may not be as tight as believed, citing ongoing economic growth and low unemployment.
Concerns among fixed-income investors arose from the Feb. 3 labor market data, which challenged the Fed’s efforts to curb inflation. Nonfarm payrolls for January exceeded estimates at 250,000, with average hourly earnings rising by 0.6%, the largest increase since March 2022. As a result, the two-year U.S. Treasury yield reached 4.48%, its highest level since Dec. 13, indicating reduced confidence in potential interest rate cuts.
Despite the long-term benefits associated with Bitcoin’s scarcity, traders acknowledged that short-term risk factors, such as the Mt. Gox exchange and the struggles of failed crypto lender Genesis, could limit BTC’s upside. Mt. Gox, which went bankrupt after a 2014 hack, is set to distribute 142,000 BTC to creditors. Genesis, controlled by Digital Currency Group, is seeking U.S. court approval to liquidate $1.38 billion in shares in the Grayscale Bitcoin Trust (GBTC).
In addition to the macroeconomic impact of the Fed’s decision to keep interest rates above 5.25%, there are potential risks to investor perception arising from Bitcoin’s spot exchange-traded fund (ETF) flows. Some market participants believe that Bitcoin’s price has been sustained primarily by inflows from BlackRock’s iShares Bitcoin Trust and Fidelity’s Wise Origin Bitcoin, while GBTC experienced significant outflows in January.
Bitcoin derivatives data indicates a neutral demand for leverage longs. Typically, Bitcoin monthly futures trade at a slight premium to spot markets, indicating that sellers are asking for more money to delay settlement. In healthy markets, BTC futures contracts should trade at a 5% to 10% annualized premium, a situation known as contango. Over the past three weeks, Bitcoin traders have approached the market cautiously, with the indicator staying below the 10% neutral threshold. However, Bitcoin’s futures showed resilience and did not react negatively to the retest of the $39,000 support on Jan. 23.
To determine whether Bitcoin traders are becoming less optimistic about its price, analysts should also consider the balance between call (buy) and put (sell) options. Growing demand for put options typically indicates traders focusing on neutral-to-bearish price strategies. Analysis of Bitcoin options data on Deribit from Feb. 2 to 4 shows a growing demand for puts compared to calls. However, since Jan. 24, the ratio has consistently favored call options. Therefore, it would be inaccurate to conclude that BTC investors are turning bearish.
In summary, Bitcoin derivatives data suggests a reluctance to take bullish positions, but none of the identified risks seem to negate the potential benefits in the event of a resurgence in inflation. Therefore, there is no indication that Bitcoin’s price will weaken to $40,000.