Bitcoin (BTC), which was unable to break the $45,000 resistance, fell 23% over the following eight days. The bottom of $34,300 on February 24 occurred right after the Russian-Ukraine conflict escalated. This triggered a sharp sell-off.
Bitcoin fell to its lowest level in 30 Days, but Asian stocks also adjusted to the worsening economic conditions. The Hang Seng index dropped 3.5% in Hong Kong, while the Nikkei reached a 15-month low.
Bitcoin/USD at the FTX. Source: TradingView
First, one must ask whether cryptocurrencies overreact to risk assets. Bitcoin volatility is higher than traditional markets. It averages 62% per annum.
The Russell 2000 US small- and mid-cap stock indexes have a 30% annualized volatility. Chinese equities are at 32%, according to the MSCI China Index.
Bitcoin/USD (purple, left scale) vs. Hang Seng Index (blue, left scale) vs. Bitcoin/USD (purple, left scale)
The correlation between Bitcoin and the Hang Seng stock exchange and the U.S. Russell 2000 Index is high. One possible explanation could be the U.S. Federal Reserve’s tightening goals. The monetary authority caused a “flight towards safety” movement by threatening to increase interest rates and cutting bond buybacks.
Investors often seek protection from cash U.S. dollars and Treasury ills, despite the fact that returns are not guaranteed. This is particularly true in times of extreme uncertainty.
Bitcoin futures traders are mildly bearish
Bitcoin derivatives can be used to understand the position of professional traders. To compensate traders who “lock in” the money for up to three months, the annualized premium for Bitcoin futures should be between 5% and 12%
Bitcoin 3-month futures premium. Source: Laevitas
A level below 5% is extremely bearish. An annualized premium of more than 12% is bullish. The futures premium fell below 5% on February 9, as a result of professional traders losing confidence.
The current 2.5% level is the lowest since July 20th, but it marked a reverse from the 74-day price correction. The futures premium was a backward-looking indicator. In fact, it saw a 71% rally after that event.
Blue and purple Bitcoin/USD correlations vs. Russell 2000. Source: TradingView
You can see how Bitcoin’s correlation with the Russell 2000 Index was quite high on July 20, But, the situation quickly changed when Bitcoin’s rally began, independently from traditional markets.
Although the bottom may be reached, uncertainty could cause further downsizing
The correlation metric is similar to the futures premium. It uses historical data and should not be used for trend reversals. Professional fund managers and investors tend to avoid volatile assets in turbulent markets.
It is important to understand market psychology in order to avoid unexpected price swings. These short-term corrections are expected to be the norm, even if Bitcoin is still considered a risky asset.
It makes sense to wait for more signs of decoupling before you predict a Bitcoin bottom.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.