Bitcoin (BTC) price crossed $25,000 on Feb. 21, accumulating a 53% year-to-date gain at the time. . This stoked investors’ hopes for a soft landing and possible aversion to a recession in the US economy.
The pinnacle of success for the US Federal Reserve’s strategy would be to raise interest rates and reduce its $9 trillion balance sheet drawdown without significantly hurting the economy. If this miracle happens, the result would benefit risky assets including stocks, commodities and Bitcoin.
Unfortunately, cryptocurrency markets took a hit after the $25,200 level was rejected and Bitcoin price dropped 10% between Feb 21st and Feb 24th. Regulatory pressure, mainly from the US, partially explains investors’ justification for the worsening market conditions.
In an interview with New York Magazine on Feb. 23, Securities and Exchange Commission (SEC) Chairman Gary Gensler stated that “everything but Bitcoin” is potentially a security instrument and falls under the agency’s jurisdiction. However, several lawyers and policy analysts commented that Gensler’s opinion “isn’t the law”. Therefore, the SEC did not have the authority to regulate cryptocurrencies unless it proved its case in court.
Additionally, at a G20 meeting, US Secretary Janet Yellen stressed the importance of implementing a strong regulatory framework for cryptocurrencies. Yellen’s February 25 comments followed International Monetary Fund (IMF) Managing Director Kristalina Georgieva pointing out that “if regulation fails”, a blanket ban “should not be “taken off the table”.
Let’s look at Bitcoin derivatives metrics to better understand how professional traders are positioned in current market conditions.
Asia-based stablecoin demand is stagnant
Traders should refer to the USD Coin (USDC) premium to gauge cryptocurrency demand in Asia. The index measures the difference between China-based peer-to-peer stablecoin transactions and the US dollar.
Excessive demand for buying cryptocurrencies can push the indicator above fair value by 104%. On the other hand, the stablecoin market supply is flooded during bear markets, causing a discount of 4% or more.
After peaking at 4% in late January, the USDC premium indicator on Asian markets has dropped to a neutral 2%. Since then, the metric has stabilized at a modest 2.5% premium, which should be interpreted as positive given the recent regulatory FUD.
BTC future premium stuck even after price bounced at $25,000
Bitcoin quarterly futures are the instruments of choice for whales and arbitrage tables. Due to the settlement date and the difference in price of the spot markets, they can seem complicated to retail traders. However, its most notable advantage is the lack of a floating finance rate.
These fixed-month contracts often trade at a small premium in the spot markets, indicating that sellers are asking for more cash to hold liquidation longer. Consequently, futures markets should trade at an annualized premium of 5% to 10% in healthy markets. This situation is known as contango and is not unique to cryptocurrency markets.
The chart shows traders flirting with neutral sentiment between Feb 19-24, with Bitcoin price above $23,750. However, the indicator failed to enter the neutral to bearish 0% to 5% area as additional regulatory uncertainty was added, especially after Gensler’s remarks on Feb. 23. As a result, it became clear that professional traders were not comfortable with Bitcoin price breaking above $25,000.
Related: Is SEC Action Against BUSD More About Binance Than Stablecoins?
Weak economic data has shifted control to the bulls
Since February 25th, Bitcoin price has risen by 4.5%, indicating that the impact of the regulatory news flow has been limited. More importantly, the global stock market reacted positively on Feb. 27 after the US Department of Commerce reported that durable goods orders were down 4.5% in January from the previous month. This data has increased the pressure for the US Fed to reduce its interest rate hike program sooner than expected.
As Bitcoin’s 50-day correlation with S&P 500 futures currently stands at 83%, cryptocurrency traders are more inclined to support strengthening risky asset prices throughout the week. A correlation indicator above 70% indicates that both assets are moving in tandem, meaning that the macroeconomic backdrop is likely to play a key role in determining the overall trend.
Unless there is additional pressure from regulators or conflicting economic data, the odds favor Bitcoin bulls given BTC futures and Asian stablecoin metrics.
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This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.