Bitcoin Struggles Amid Interest Rate Uncertainties and Market Risks
Summary:
Bitcoin's price struggled to maintain the $43,000 support level amid anticipation for interest rate cuts by the U.S. Federal Reserve. Suggestions that the monetary authority might delay reducing interest rates added further strain. Risks contributing to Bitcoin's value include 142,000 Bitcoin set to be distributed by the bankrupt Mt. Gox exchange and the struggles of cryptocurrency lender Genesis. Despite potential long-term benefits, short-term risks and reluctance to take bullish positions suggest caution amongst traders, though there's no specific indication of a plummet to $40,000.
On February 5, Bitcoin (BTC) experienced a tough time maintaining its price above the $43,000 support level. The challenge arose after the U.S. Federal Reserve (Fed) Chair Powell contradicted market anticipation for forthcoming interest rate reductions. This coupled-up with the limited interest from leverage longs in BTC derivatives markets ignited predictions of a possible drop to $40,000.
In an interview broadcast on 60 Minutes on February 4, Jerome Powell, the Chair of the Federal Reserve, made it clear that the central bank committee needed more evidence of nearing the 2% inflation target before acting. He voiced optimism about the status of the economy, which he described as “well-positioned.” Yet, he pointed out the potential for "three quarter-point rate reductions this year," depending on labor market trends, which was in contrast with expecting these cuts to begin in March, as investors initially thought.
On February 5, an article by Neel Kashkari, President of the Minneapolis Fed, added to the tension surrounding Bitcoin's price. He indicated that it might take a while before the monetary authority considers decreasing interest rates. Kashkari put forward the argument that "the present monetary policy posture might not be that tight," taking into consideration the continued economic expansion and low joblessness rates.
Investors in fixed-income were impacted by labor market data from February 3, which put the Fed's efforts to control inflation to the test. Nonfarm payrolls for January surprisingly went beyond predictions, standing at 250,000, with average hourly earnings inflating by 0.6%, marking the largest rise since March 2022. This resulted in the 2-year U.S. Treasury yield reaching 4.48%, its apex since Dec. 13, 2023, signifying a lessened belief in likely interest rate reductions.
Even though Bitcoin carries potential long-term benefits linked to its scarcity and its ability to maneuver sanctions, traders concede that near-term risk elements, emphasized by cryptocurrency enthusiast @blockgraze on the X social network, might be limiting BTC's potential increases.
Notably, these risk elements entail the estate of the Mt. Gox exchange, which declared bankruptcy after a 2014 cyber-attack, and is set to dispense 142,000 Bitcoin to its creditors. Additional negative influences on Bitcoin's price stem from the struggles of unsuccessful crypto lender Genesis, which is under the control of Digital Currency Group (DCG), and is presently trying to get U.S. court approval to liquidate $1.38 billion in shares in the Grayscale Bitcoin Trust (GBTC).
Aside from the macroeconomic influences of the Fed's decision to keep interest rates above 5.25%, potential risks to the investor perspective occur from Bitcoin's spot exchange-traded fund (ETF) flows. According to @blockgraze, some in the market think that the price of Bitcoin has been mainly supported by cash inflows from the iShares Bitcoin Trust (IBIT) by BlackRock and Fidelity's Wise Origin Bitcoin (FBTC). In contrast, GBTC experienced the second-highest outflows in January among all ETFs covered by Morningstar—an outright sale of $5.7 billion.
Bitcoin's monthly futures traditionally trade at a minor surplus to the spot markets, implying that sellers demand more to delay transactions. Consequently, BTC futures contracts should be trading at a 5 to 10% annualized surplus under normal market circumstances — a state referred to as contango, not unique to crypto markets.
In the past three weeks, Bitcoin traders have approached the market carefully, with the indicator remaining below the 10% neutral boundary. Bitcoin's futures remarkably showed fortitude, not responding negatively to the retesting of the $39,000 support on Jan 23.
To ascertain if Bitcoin traders are becoming less hopeful about its price, the balance between call (buy) and put (sell) options should also be examined. A rising demand for put options usually signifies traders opting for neutral-to-bearish price policies.
A review of Bitcoin options data on Deribit from Feb. 2 to Feb. 4 records a rising need for puts compared to calls. Nonetheless, from Jan. 24, the balance has continually favored call (buy) options. Thus, stating that BTC investors are becoming bearish would be erroneous.
In essence, Bitcoin derivatives data reveal a hesitation to take optimistic standpoints, but none of the singled out risks appear to negate potential benefits in the case of an inflation comeback—therefore, it doesn’t suggest a drop in Bitcoin’s price to $40,000.
This report does not provide investment advice or suggestions. Every investment and trading action carries uncertainty, and readers should carry out their own analysis while making a decision.
Published At
2/5/2024 10:53:52 PM
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