Bitcoin Struggles to Maintain Value Above $71,000 as Bearish Sentiment Lingers
Bitcoin (BTC) has been facing difficulties in maintaining its value above the $71,000 mark since March 25, leading some to interpret this as a sign of bearish momentum. However, a closer look at the BTC derivatives market reveals a more stable environment, with the previous overwhelming optimism now subsiding.
The Bull Case for Bitcoin Strengthened by Resilient U.S. Inflation
Despite its challenges in holding ground above $70,000, Bitcoin has found support from certain analysts who believe that the recent U.S. inflation figures, which showed unexpected resilience, and the unsustainable fiscal trajectory of the U.S. government, create the perfect backdrop for investing in scarce assets.
Market analyst MatticusBTC attributes the surge in inflation to the significant monetary expansion carried out by the U.S. Federal Reserve between 2020 and 2021. As a result, the Federal Reserve may be forced to maintain elevated interest rates. However, this strategy has its limitations, particularly when considering the interest burden of the U.S. government debt.
Higher interest rates can pose challenges for businesses and households, especially when it comes to refinancing or obtaining new loans. This often leads to a decrease in investors’ appetite for risk-on assets, which in turn slows down economic growth. However, since 2024, investors have been looking for alternatives to invest their money in, apart from U.S. Treasury bonds.
In the past 30 days, both gold and Bitcoin have reached all-time highs, while U.S. government 2-year notes have dropped to a nine-month low as of April 9. This movement indicates a lack of investor appetite for a 4.7% fixed-income yield as a hedge against inflation.
Bitcoin’s Performance Tied to the Stock Market
Critics of Bitcoin suggest that the recent drop in the S&P 500 index from its all-time high of 5,265 on March 28 may signal an upcoming economic downturn. Given the strong correlation between Bitcoin and the stock market, which has been over 80% in the past month, Bitcoin’s price may initially decline if stock market issues persist.
Stability in BTC Futures and Options Markets
Despite facing resistance at the $72,000 level, the BTC futures and options markets are currently displaying a level of neutrality. This stability is supported by two crucial indicators that highlight a healthier demand for leverage compared to the situation at the end of March. Concerns over excessive leverage are valid, especially considering the open interest in BTC futures at $34.3 billion.
Perpetual contracts, also known as inverse swaps, incorporate a rate that is recalculated every eight hours. A positive funding rate indicates increased demand for bullish positions.
Data reveals that the funding rate peaked at 0.07% per eight-hour period on March 31, equivalent to an annualized rate of 1.5% per week. However, this indicator has since adjusted, with the current rate at 0.3% weekly. This decrease in pressure on traders using leverage for long positions signals a more balanced market dynamic and lays the foundation for potential bullish momentum.
Analyzing Options Demand to Gauge Market Sentiment
To determine whether the decreased demand for leveraged long positions accurately reflects market sentiment, one must analyze the balance between call (buy) and put (sell) options demand. An increase in put option activity often indicates a neutral or bearish market outlook.
Data from the past few weeks shows that put options have consistently been outnumbered by call options, with a significant 35% average volume disparity. This suggests a lower demand for protection against price declines, which is an intriguing trend considering Bitcoin’s multiple tests of the $64,500 support level in early April.
While there is no certainty that Bitcoin will surpass its all-time highs in the near future, the threat of a major sell-off triggered by excessive leverage seems to have diminished. Therefore, unless there is a significant drop in overall economic conditions, it is unlikely that Bitcoin will fall below $65,000.
Disclaimer: This article does not provide investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research before making a decision.