Bitcoin Surpasses $45,000 as Investors Seek Protection from Inflation
On February 8th, Bitcoin reached a price level of $45,000 for the first time since January 12th, following a 6% rally in just two days. This surge in price coincided with the S&P 500 reaching a record high on February 7th, suggesting that investors are seeking protection from inflation. In addition to the rally in cryptocurrencies and stocks, Bitcoin derivatives data indicate the potential for further bullish momentum.
Bitcoin’s rally can be attributed to the soaring United States government debt, which currently stands at a historical high of $34.2 trillion. While some argue that the absolute number is less important than the interest paid, Federal Reserve Chair Jerome Powell acknowledged the long-term “unsustainable fiscal path” in a February 4th interview. This situation creates a strong incentive for the Fed to cut interest rates from the current 5.25% throughout 2024, which aligns with market expectations. When returns on fixed-income investments are reduced, investors tend to turn to stocks and commodities for refuge.
The Congressional Budget Office predicts that the U.S. budget deficit will increase by nearly 66% within the next 10 years due to debt-servicing costs. The U.S. total public debt is also expected to surpass 100% of the nation’s gross domestic product by 2025, according to the independent fiscal watchdog of Congress. This puts pressure on the U.S. dollar as the global reserve currency and the demand for U.S. Treasuries.
Furthermore, U.S. consumer debt delinquency rates have reached their highest level in 12 years. Data from the New York Fed showed that consumer credit card debt balances had an annualized 8.5% default rate in the final months of 2023, while auto loans reached 7.7%. This stress on household balance sheets could potentially have negative implications for the banking sector and the overall economy.
Given the uncertain macroeconomic environment, Bitcoin and other scarce assets present an opportunity for investors. However, the rally to $45,000 does not guarantee that this new price level will be sustained. Investors should closely examine the positions of whales and arbitrage desks to determine if excessive leverage played a role in the price movement.
Bitcoin derivatives data indicate that there is no excessive optimism in the market. Pro traders typically prefer monthly futures contracts due to the absence of a funding rate, causing these instruments to trade 5% to 10% higher compared to regular spot markets. The BTC futures premium recently reached its highest level in three weeks, surpassing the 10% threshold for bullish markets. Additionally, the BTC options 25% skew, which measures the optimism of pro traders, entered the -7% bullish area for the first time in two months after Bitcoin’s price surpassed $45,000. These metrics suggest moderate optimism, which is positive considering concerns about worsening macroeconomic conditions.
It is worth noting that the approval of the spot Bitcoin exchange-traded fund on January 10th resulted in increased volatility and the forceful liquidation of $150 million worth of long futures contracts within two days. This cautionary tale may explain why some investors are exercising caution despite the current bullish momentum. However, the present Bitcoin derivatives metrics align with the current market conditions, indicating the potential for further bullish momentum and a possible path towards $49,000.
Please note that this article does not provide investment advice or recommendations. It is important for readers to conduct their own research and analysis before making any investment or trading decisions.