Bitfinex Alpha | More BTC Volatility to Come as Market Remains Prone to Pull-backs

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Bitfinex Alpha | More BTC Volatility to Come as Market Remains Prone to Pull-backs

Post the Bitcoin ETF approvals, the sell-off seen at the end of last week was a direct result of short-term holders realising substantial profits against their average realised buy-in price of around $38,000.

We maintain our stance that the market remains prone to corrections and pull-backs in this early part of the year. We note that immediately preceding the sell-off, there was an unprecedented transfer of ‘in the money’ BTC to exchanges.

However, despite this selling pressure, we see a number of factors that continue to show an underpinning to Bitcoin’s price. Firstly, there has been a significant increase in ERC-20 stablecoins on exchanges, signalling heightened market speculation and investor confidence. Historically, an expansion of stablecoins leads to increased buying.

Secondly, the Bitcoin CME futures contract continues to see high levels of open interest, hitting a new year-to-date high just before the ETF approvals were announced, and even post the event, remains at high levels. This suggests that sophisticated investor interest in BTC continues, albeit through derivative instruments rather than direct holdings.

A third underpinning is that long-term holders remain steadfast in their positions, underscoring a market that is resilient yet susceptible to short-term volatility.

In the macro environment, December consumer prices rose more than anticipated, primarily due to increasing rental costs. However, strong job creation and real wage growth continues, with wages growing faster than inflation.

We continue to highlight the balancing act that the Fed has to navigate as it seeks to foster growth while controlling inflation. Planned rate cuts in 2024 are intended to support the economy, but they must be carefully calibrated to avoid reigniting inflation.

The current market expectations, however, are positive. Most expect  – as do we – a reduction in Fed rates, particularly as over $3 trillion in corporate debt, accumulated at low-interest rates during the pandemic, will confront higher rates in 2025. The Fed will be keen to ensure that it does not place an undue burden on corporate growth. Furthermore, the expiration of the 2017 Tax Cuts and Jobs Act at the end of 2025 necessitates adjustments in monetary policy.

In such a scenario, the Treasury bond yield curve is no longer inverting and transitioning back to a more conventional structure and a renewed sense of optimism. 

Investors have also started shifting assets away from money market funds to longer-term Treasury bills and private equity funds, reflecting a preference for risk. Concurrently, the Federal Reserve is considering a slower reduction of its asset portfolio to maintain market liquidity and efficiency. 

News-wise, we’ve had significant developments. First, the SEC encountered a security breach in its ‘X’ account, leading to an unauthorised announcement regarding Bitcoin ETFs, which momentarily jolted the BTC price and sparked a broader conversation about cybersecurity vulnerabilities within financial regulatory bodies. 

Now the ETF approval has officially come through, we look forward to a substantial widening of the Bitcoin investor base, bringing with it a  fresh wave of enthusiasm among investors and market players. 

The impact of this approval was evident in the market dynamics. Following the SEC’s nod, the BTC price surged, reflecting the market’s positive reception of this development. The first day of trading for the 11 new spot Bitcoin ETFs saw a remarkable $4.6 billion in trade volume, underscoring the high investor interest and the potential growth trajectory of these financial products.
Bitfinex Alpha salutes this milestone achievement and remains positive on the future outlook for BTC – albeit we remain vulnerable to pullbacks in the short term. Happy trading!

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