Bitcoin (BTC) has been struggling to maintain its value above $71,000 since March 25, leading some to believe that bearish momentum is on the horizon. However, a closer look at the BTC derivatives market reveals a more stable environment as the previous optimism has subsided.
The recent U.S. inflation figures, which showed unexpected resilience, along with the unsustainable U.S. government fiscal trajectory, have strengthened the case for investing in scarce assets like Bitcoin. Market analyst MatticusBTC attributes the inflation surge to the significant monetary expansion orchestrated by the U.S. Federal Reserve during the 2020-2021 period. This may result in the Federal Reserve having to maintain elevated interest rates, but there are limitations to this strategy, particularly considering the interest burden of U.S. government debt.
Higher interest rates pose problems for businesses and households, reducing investors’ appetite for risk-on assets and slowing down economic growth. However, in 2024, investors began seeking alternatives to U.S. Treasury bonds. In the past 30 days, both gold and Bitcoin have reached all-time highs, while U.S. government 2-year notes dropped to a nine-month low on April 9. This suggests that investors are not interested in a 4.7% fixed-income yield as a hedge against inflation.
The performance of the stock market may dictate Bitcoin’s performance in the near term. Critics argue that the recent drop in the S&P 500 index from its all-time high on March 28 could signal an upcoming economic downturn. Since Bitcoin has a strong correlation with the stock market, if stock market issues persist, Bitcoin’s price may initially decline.
Despite facing resistance at the $72,000 level, the BTC futures and options markets are currently displaying a level of neutrality. This stability is supported by two critical indicators that highlight a healthier demand for leverage compared to the situation at the end of March. The concern over excessive leverage is valid, especially with the open interest in BTC futures at $34.3 billion.
Perpetual contracts, also known as inverse swaps, have a funding rate that is recalculated every eight hours. A positive funding rate indicates increased demand for bullish positions. On March 31, the funding rate peaked at 0.07% per eight-hour period, equivalent to an annualized rate of 1.5% per week. However, the current rate is 0.3% weekly, indicating reduced pressure on traders using leverage for long positions. This signals a more balanced market dynamic and sets the stage for potential bullish momentum.
To confirm whether the decreased demand for leveraged long positions accurately reflects market sentiment, one should analyze the balance between call (buy) and put (sell) options demand. An increase in put option activity often indicates a neutral or bearish outlook. Data from the past few weeks shows that put options have consistently been outpaced by call options, with a significant 35% average volume disparity. This suggests a lower demand for protection against a price decline, which is interesting considering Bitcoin’s multiple tests of the $64,500 support level in early April.
While it is uncertain whether Bitcoin will surpass its all-time highs in the near future, the threat of a major sell-off triggered by excessive leverage seems to have subsided. Unless there is a significant drop in overall economic conditions, it is unlikely that Bitcoin will fall below $65,000.
It is important to note that this article does not provide investment advice or recommendations. Every investment and trading move carries risk, and readers should conduct their own research before making any decisions.