Bitcoin (BTC) faced challenges as its price struggled to maintain support at $43,000 on Feb. 5. The setback occurred after Federal Reserve Chair Jerome Powell dismissed market expectations for interest rate cuts in the coming months. This lack of interest from BTC derivatives traders fueled speculation of a possible drop to $40,000.
The drop in Bitcoin’s price can be attributed to the high U.S. interest rates. In an interview with 60 Minutes on Feb. 4, Powell clarified that the central bank needs more assurance that inflation is nearing the 2% target before taking action. While Powell expressed positive sentiments about the economy, stating that it is “in a good place,” he mentioned the possibility of three quarter-point rate cuts this year based on official projections, depending on job market behavior. However, this contradicted investors’ expectations of interest rate cuts starting in March.
Adding to the pressure on Bitcoin’s price was an essay from Minneapolis Fed President Neel Kashkari on Feb. 5, suggesting that the monetary authority might take time before reducing interest rates. Kashkari argued that the current monetary policy may not be as tight as believed, citing ongoing economic growth and low unemployment.
Concerns among fixed-income investors arose from the Feb. 3 labor market data, which challenged the Fed’s efforts to curb inflation. Nonfarm payrolls for January exceeded estimates at 250,000, with average hourly earnings rising by 0.6%, the largest increase since March 2022. As a result, the two-year U.S. Treasury yield reached 4.48%, its highest level since Dec. 13, indicating diminished confidence in potential interest rate cuts.
Despite the potential long-term benefits of Bitcoin’s scarcity, traders acknowledged that short-term risk factors may be limiting its upside. These risk factors include the Mt. Gox exchange, which went bankrupt after a 2014 hack and is now set to distribute 142,000 BTC to creditors. Additional negative pressure on Bitcoin’s price comes from the struggles of failed crypto lender Genesis, controlled by Digital Currency Group, seeking U.S. court approval to liquidate $1.38 billion in shares in the Grayscale Bitcoin Trust (GBTC).
In addition to the macroeconomic impact of the Fed’s decision to keep interest rates above 5.25%, there are potential risks to investor perception arising from Bitcoin’s spot exchange-traded fund (ETF) flows. Some market participants believe that Bitcoin’s price has primarily been sustained by inflows from BlackRock’s iShares Bitcoin Trust and Fidelity’s Wise Origin Bitcoin. In contrast, GBTC experienced the second-highest outflows in January among all ETFs covered by Morningstar, with a net sale of $5.7 billion.
Bitcoin derivatives data shows a neutral demand for leverage longs. In healthy markets, Bitcoin monthly futures typically trade at a slight premium to spot markets, indicating that sellers are asking for more money to delay settlement. BTC futures contracts should trade at a 5% to 10% annualized premium in such markets, a situation known as contango, which is not unique to crypto markets.
Over the past three weeks, Bitcoin traders have approached the market cautiously, with the indicator staying below the 10% neutral threshold. Notably, Bitcoin’s futures showed resilience and did not react adversely to the retest of the $39,000 support on Jan. 23.
To determine whether Bitcoin traders are becoming less optimistic about its price, analysts should also examine the balance between call (buy) and put (sell) options. Growing demand for put options typically indicates traders focusing on neutral-to-bearish price strategies.
An analysis of Bitcoin options data on Deribit from Feb. 2 to 4 indicates a growing demand for put options compared to calls. However, since Jan. 24, the ratio has consistently favored call options. Therefore, it would be inaccurate to conclude that BTC investors are turning bearish.
In conclusion, Bitcoin derivatives data suggests a reluctance to take bullish positions, although none of the identified risks seem to negate the potential benefits in the event of a resurgence in inflation. Therefore, there is no indication of Bitcoin’s price weakening to $40,000.
Please note that this article does not provide investment advice or recommendations. Every investment and trading decision carries risks, and readers should conduct their own research before making any decisions.