Bitcoin traders say $34,000 is the bottom, but it’s too early to tell
Traders say Bitcoin has bottomed, but it’s important to consider its correlation with the stock market.
Bitcoin (BTC) is down 23% in 8 days after failing to break the $45,000 resistance on Feb. 16. Shortly after the Russia-Ukraine conflict escalated, it hit a low of $34,300 on Feb. 24, prompting a massive sell-off in risky assets.
As Bitcoin hit a 30-day low, Asian stocks are also correcting worsening conditions, evidenced by the fact that Hong Kong’s Hang Seng Index (HSI) is down 3.5% and only the Nikkei is down hit a 15-month low.
BTC/USD price chart | Source: TradingView
The question is whether cryptocurrencies are overreacting compared to other risky assets. Of course, Bitcoin’s volatility is much higher than traditional markets at 62% per year.
For comparison, the US small and mid-cap stock market index, the Russell 2000, has an annual volatility of 30%. Meanwhile, Chinese equities were up 32% according to the MSCI China Index.
BTC/USD (purple, left) vs. Hang Seng Index (in blue) vs. Russel 2000 (orange)
There is a high correlation between Bitcoin, the Hang Seng stock market and the US Russell 2000 Index. One explanation for this could be the US Federal Reserve’s (Fed) tightening target. By reducing asset purchases and threatening to raise interest rates, the Fed has sparked a “flight to safety” movement.
While there are no returns adjusted for 7.5% inflation, investors often seek protection in US dollars and Treasury bills. This is especially true in times of extreme uncertainty.
Bitcoin futures traders are moderately down
To understand the position of professional traders, everyone should follow the Bitcoin derivatives market. The annual premium of bitcoin futures contracts will range from 5% to 12% to compensate traders for “locking” funds for two to three months until the contract expires.
Bitcoin 3 Month Futures Premium | Source: Laevitas
A level below 5% is extremely bearish, while an annual premium above 12% indicates an uptrend. As shown above, the futures premium fell below 5% on February 9th, showing a lack of confidence from professional traders.
Although the current 2.5% represents the lowest level since July 20th, it marks a trend reversal from the 74-day price correction. In fact, this event was followed by a 71% rally, confirming the thesis that futures premium is a backward indicator.
BTC/USD correlation (in blue) vs. Russell 2000 (purple) for 30 days | Source: TradingView
Note that Bitcoin’s correlation with the Russell 2000 Index was relatively high on July 20th. However, this situation quickly reversed as BTC began its independent rally from traditional markets.
The bottom may be in, but uncertainty could lead to further declines
Similar to a futures contract premium, it should not be used to predict trend reversals. Investors, especially professional fund managers, avoid highly volatile investments in times of market turbulence.
Understanding market sentiment is essential to avoid sudden price spikes. Therefore, as long as Bitcoin is viewed as a risky asset by market participants, these short-term corrections should be the norm rather than the exception.
Therefore, it makes sense to wait for the next signs of divergence before predicting a Bitcoin bottom.
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