On January 3, Bitcoin experienced a significant 9.6% price correction, causing the price to drop to $40,940. This led to turmoil and substantial losses for derivative traders, resulting in $137 million in leverage long futures liquidations, the highest in over four months.
Fortunately, the price of Bitcoin rebounded quickly, currently trading above $44,000. This has raised speculation about whether the price can reach $46,000 before the upcoming SEC decision on several pending spot Bitcoin exchange-traded fund (ETF) applications.
The increasing United States government debt and expectations of interest rate cuts by the U.S. Federal Reserve provide a positive scenario for risk-on markets, including cryptocurrencies. Minutes from the recent Federal Open Market Committee meeting, released on January 4, strengthened expectations of quarter-point cuts this year. Bloomberg reported that U.S. government debt interest has exceeded $1 trillion per year.
The mounting debt and political discord in the U.S. have led to credit rating downgrades for the country. Fitch downgraded its sovereign debt rating from AAA to AA+ in August 2023, and Moody’s warned of a potential downgrade from the remaining AAA rating. The threat of a government shutdown looms as House Republicans aim to cut spending below the agreed-upon levels in the June debt ceiling deal, while Senate Democrats oppose such cuts.
Investors are anticipating further U.S. government debt issuance and the subsequent loss of the dollar’s purchasing power. This trend tends to affect other fiat currencies as central banks follow the Fed’s lead by keeping high interest rates to restrain economic growth. However, the U.S. deficit could become unsustainable if the monetary authority insists on achieving the 2% inflation target before lowering interest rates.
Analyzing BTC derivatives markets is crucial to determining whether Bitcoin’s price gains can continue after the January 3 crash and potentially break above the $46,000 resistance. Despite the $137 million liquidation, BTC futures open interest remains at $18.5 billion, indicating that less than 1% of contracts were affected by the recent price crash. Additionally, data remains consistent with the previous month, suggesting that recent price swings may not be significant.
To understand professional traders’ positions after the surprise rally, it is essential to analyze BTC derivatives metrics. Bitcoin monthly futures typically trade at a 5%–10% annualized premium compared to spot markets, indicating that sellers demand additional money to postpone settlement. Currently, the Bitcoin futures premium stands at 18%, remaining unchanged from the previous week. The peak of 31% on January 2 was an anomaly caused by excessive confidence in ETF approval odds before January 10, resulting in liquidations during price volatility.
Examining the Bitcoin options markets provides insight into whether the dip below $41,000 dashed bullish hopes. During anticipation of a Bitcoin price drop, the delta 25% skew tends to rise above 7%. In contrast, periods of excitement typically see a delta skew below negative 7%. Interestingly, the Bitcoin options skew barely changed during the recent price drop on January 3, suggesting that professional traders were not affected and did not rush for protective put options. This indicates that traders did not fear a negative or postponed ETF decision.
Experienced traders are accustomed to the FOMO (fear of missing out) and FUD (fear, uncertainty, and doubt) that surround significant events like a potential ETF approval. However, this does not guarantee a bull run above $46,000 ahead of the SEC decision, especially considering that investors had ample time to accumulate and strategize due to the regulator’s publicized deadlines.
It is important to note that this article does not provide investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research before making a decision.