Bitcoin experienced a significant volatility spike on Aug. 12, initially dropping 3.2% in less than an hour to $57,844 before rebounding by 5% to reach $60,700 within the next thirty minutes. This price swing reflects the uncertainty surrounding macroeconomic conditions, particularly following remarks from a United States Federal Reserve governor over the weekend. These remarks also led to gold prices surging to $2,458, just 1% below its all-time high.
Economic downturn is the biggest risk for a Bitcoin price crash
Traders are now questioning whether Bitcoin might retest the $49,248 low from Aug. 5, especially given the declining interest in leveraged BTC longs and the increasing risk of a correction in the global stock market.
JPMorgan economists have raised the probability of a US economic recession in 2024 to 35%, up from a previous estimate of 25%. The report, according to Bloomberg, cited weak labor market conditions and a restrictive Fed policy as key factors.
On Aug. 10, Fed Governor Michelle Bowman stated that inflation risks persist and the labor market remains weak, which reduces the likelihood of an interest rate cut in September, as reported by Yahoo Finance. Investors are now in a holding pattern, awaiting the release of the US Producer Price Index on Aug. 13 and the Consumer Price Index on Aug. 14. These data points are expected to provide clues on whether the Fed will meet market expectations of at least two interest rate cuts by the end of 2024.
To assess the impact of the recent Bitcoin price volatility, it's crucial to analyze the Bitcoin futures markets. BTC monthly futures carry an inherent cost due to their extended settlement period, with sellers typically demanding a 5% to 10% annualized premium to offset this factor.
The annualized Bitcoin futures premium (basis rate) fell to 6% on Aug. 12, down from 9% on Aug. 11 as the $58,000 support level was retested. While the current level remains within the neutral range, it signals a lack of demand for leverage from bulls, a trend that has persisted since July 30, the last time the premium exceeded 10%.
Bitcoin investors become more sophisticated and less price-sensitive
To determine whether this sentiment shift is isolated to the Bitcoin futures market, it's essential to examine the demand in BTC options markets. A delta skew metric rising above 7% typically signals expectations of a price drop, while a negative 7% skew generally reflects bullish sentiment.
The Bitcoin options skew metric has remained relatively stable over the past week, indicating no significant imbalance in the pricing of put (sell) and call (buy) options. This data reflects a decline in sentiment compared to late July, when the indicator suggested moderate bullishness. However, it is important to note that there are no signs of stress despite the price drop below $50,000 on Aug. 5.
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One possible explanation for the current neutral sentiment is the reduction of excessive leverage in the market. The volatility of the past week has likely reduced the demand for leverage, with both bulls and bears being liquidated to the tune of $634 million in BTC futures. However, this does not fully explain why Bitcoin futures open interest currently stands at $28.8 billion.
The most likely explanation for the apathy in Bitcoin’s derivatives metrics is the prevalence of “cash and carry” strategies, where traders engage in fixed-income operations to capture the futures premium. In this scenario, market direction becomes irrelevant as one side offsets the other. If traders had been using 5x or higher leverage, they would have faced liquidation during the 23% price drop between Aug. 2 and Aug. 5.
Data suggests that Bitcoin derivatives are becoming less reliant on retail trading, particularly as CME has emerged as the leader with a 29% market share. In essence, even if Bitcoin price volatility persists, there is no clear indication that traders are turning bearish or that excessive liquidation could trigger cascading sell-offs down to $52,000.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.