The correlation between Bitcoin (BTC) and the stock markets has been unusually high since mid-March, meaning that the two asset classes have exhibited nearly identical directional movement. This data could explain why the 10% rally above $21,000 is being discounted by most traders, especially considering that S&P 500 futures gained 4% in two days. However, the speculative activity in Bitcoin and the derivatives market strongly supports the recent gains.
Interestingly, the current rally in Bitcoin came a day after the White House Office of Science and Technology Policy released a report investigating the energy use associated with digital assets. The study recommended applying reliability and energy efficiency standards. It also suggested that federal agencies provide technical assistance and initiate a collaborative process with industry.
Note how the peaks and troughs of both charts tend to coincide, but the correlation changes as investors’ perceptions and risk assessments change over time. For example, between May and July 2021, the correlation was reversed for most of the period. Overall, the stock market posted steady gains while the cryptocurrency markets slumped.
More importantly, the chart above shows the huge gap that has opened up between Bitcoin and the stock market as stocks rallied from mid-July to mid-August. A comparison using the same scale would be better, but that doesn’t work because of the difference in volatility. Even so, it is reasonable to conclude that historically these gaps tend to close.
S&P 500 futures are down 18% in 2022 through Sept. 6, while Bitcoin is down 60.5% over the same period. So it makes sense to assume that if investor appetite for risky assets returns, assets with higher volatility will do better during a rally.
However, there are other factors at play, so there is no way to predict the outcome, but the return of investors’ risk appetite would justify Bitcoin outperforming the stock market and significantly narrowing the performance gap.
Professional traders did not expect Bitcoin to rise
The bears saw $120 million worth of futures contracts liquidate, the highest number since June 13. Normally one would not expect this result considering that Bitcoin had lost 13% in the two weeks prior to September 7th, but one could assume that the short sellers (bears) were caught off guard when the sell-off engine of the exchanges were quick to buy those orders.
However, there is other anecdotal evidence hidden in the settlement data provided by derivatives exchanges.
Note that the retail-led exchanges (Binance and Bybit) accounted for a mere 17.4% of the total force-sealed orders, while their combined market share in Bitcoin futures is 30.6%. The data leaves no doubt that the OKX and FTX whales were the ones that were strangled.
Another interesting fact that differentiates the 10% rally on September 9 is the dominance of Bitcoin, which measures its market share against the rest of the other cryptocurrencies.
Notice how the indicator shot up from 39% to the current 40.5%, something not seen since May 11, when Bitcoin’s rapid crash below $26,000 passed. It took another 31 days for the bear market to break through the $28,500 support on June 12. Also keep in mind that a sharp increase in BTC dominance can occur during rallies and sharp price corrections, so relying solely on these indicators provides little help in interpreting market movements.
Fear has disappeared from the options markets
The 25% slope of the options delta, which is the main “fear and greed” metric for Bitcoin options, improved enough to enter a neutral level.
If options investors feared a price crash, the slope indicator would move above +12%, while investor enthusiasm tends to reflect a -12% slope. After reaching a maximum of -18% on September 7, the indicator currently stands at 12%, which is the neutral market limit. Thus, the rally in Bitcoin on September 9 signaled that professional investors are no longer demanding excessive premiums for protective put options.
These three indicators support the relevance of Bitcoin’s recent 10% rise. A sell-off of $120 million in leveraged short (bear) positions was concentrated on less retail-oriented derivatives exchanges, the 1.5% rise in Bitcoin’s dominance rate, and options traders pricing similar risks to the upside already. the downside suggests that Bitcoin may have finally hit a bottom.
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