Bitcoin’s price experienced a significant 9.6% correction on January 3, dropping to $40,940 and causing substantial losses for derivative traders. This can be seen from the $137 million in leverage long futures liquidations, which is the highest in over four months.
Fortunately, the price of Bitcoin quickly rebounded and is currently trading above $44,000. This has led to speculation about whether the price can reach $46,000 before the upcoming decision by the SEC on several pending Bitcoin exchange-traded fund (ETF) applications.
The trend of increasing U.S. government debt and expectations of interest rate cuts by the Federal Reserve is creating a positive scenario for risk-on markets, including cryptocurrencies. Minutes from a recent Federal Open Market Committee meeting revealed expectations of multiple quarter-point rate cuts this year. The interest on U.S. government debt has exceeded $1 trillion per year, according to Bloomberg.
The growing debt and political disagreements in the U.S. have resulted in credit rating downgrades for the country. Fitch downgraded its sovereign debt rating from AAA to AA+ in August 2023, and Moody’s warned of a potential downgrade from the remaining AAA rating. There is a threat of a government shutdown as House Republicans aim to cut spending below the agreed-upon levels in the debt ceiling deal, while Senate Democrats oppose these cuts.
Investors are anticipating further U.S. government debt issuance and the subsequent devaluation of the dollar. This trend also affects other fiat currencies as central banks follow the Federal Reserve’s lead by maintaining high interest rates to curb economic growth. However, the U.S. deficit could become unsustainable if the monetary authority insists on achieving the 2% inflation target before lowering interest rates.
After the price crash on January 3, Bitcoin futures have displayed resilience. The $137 million liquidation did not have a significant impact on the bulls, as less than 1% of contracts were affected. The data remains consistent with the previous month, downplaying the significance of recent price swings.
To understand the positions of professional traders after the rally, it is important to analyze BTC derivatives metrics. Bitcoin monthly futures typically trade at a 5%–10% premium compared to spot markets, indicating that sellers demand additional money to delay settlement. The current Bitcoin futures premium stands at 18%, remaining unchanged from the previous week. However, there was an exaggerated peak of 31% on January 2, when traders had excessive confidence in ETF approval odds before January 10, leading to liquidations during price volatility.
Examining the Bitcoin options markets can provide insights into whether the dip below $41,000 affected bullish hopes. During anticipation of a price drop, the delta 25% skew tends to rise above 7%. However, during periods of excitement, the delta skew is typically below negative 7%. It is noteworthy that the Bitcoin options skew barely changed during the recent price drop on January 3, indicating that professional traders were not affected and did not rush for protective put options.
Experienced traders seem unfazed by the price swing and are accustomed to the fear of missing out (FOMO) and fear, uncertainty, and doubt (FUD) that surround significant events like a potential ETF approval. However, this does not guarantee a bull run above $46,000 before the SEC decision, especially considering that investors have had ample time to accumulate and strategize due to the regulator’s publicized deadlines.
This article does not provide investment advice or recommendations. It is important for readers to conduct their own research and make informed decisions when it comes to investments and trading, as there are risks involved.