Bitcoin (BTC) price broke through $25,000 on Feb. 21 and is up 53% year-to-date. At the time, it made sense to expect a continuation of the rally after the previous week’s US retail sales data far outperformed the market consensus. This fueled investor hopes of a soft landing and a possible recession averted for the US economy.
The pinnacle of the Federal Reserve’s strategic success would be to raise interest rates and reduce balance sheet shrinkage by $9 trillion without significantly damaging the economy. If this miracle happens, the outcome 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 plunged 10% between February 21st and 24th. Regulatory pressures, mainly from the US, partly explain investors’ reasons for the deteriorating market conditions.
In a Feb. 23 interview with New York Magazine, Securities and Exchange Commission Chairman Gary Gensler claimed that “anything but Bitcoin” is potentially a security tool and falls within the agency’s purview. However, several attorneys and political analysts commented that Gensler’s opinion was “not the law.” Therefore, the SEC had no authority to regulate cryptocurrencies unless they proved their case in court.
Additionally, US Treasury Secretary Janet Yellen stressed the importance of implementing a strong regulatory framework for cryptocurrencies at a G20 meeting. Yellen’s comments on February 25 followed the International Monetary Fund’s executive director, Kristalina Georgieva, who indicated that “if regulation fails,” then an outright ban “should not be taken off the table.”
Let’s look at Bitcoin derivatives metrics to better understand how professional traders are positioned in the current market conditions.
Demand for stablecoins from Asia is stagnating
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 trading and the US dollar.
Excessive buying demand for cryptocurrencies can push the indicator 104% above fair value. On the other hand, the stablecoins market supply is flooded during declining markets, resulting in a discount of 4% or more.
USDC peer to peer vs USD/CNY. Source: OKX
After peaking at 4% in late January, the USDC premium indicator has fallen to a neutral 2% in Asian markets. The metric has since stabilized at a modest 2.5% premium, which should be interpreted as positive given the recent regulatory FUD.
BTC futures premium remained at $25,000 even after the price was rejected
Bitcoin quarterly futures are the instruments of choice for whales and arbitrage desks. They can seem complicated to retailers due to their settlement date and price difference to spot markets. However, their most notable advantage is the lack of a fluctuating production rate.
These fixed-term contracts typically trade at a slight premium to spot markets, indicating sellers are asking for more money to hold back settlement 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 exclusive to crypto markets.
Bitcoin 2 Month Futures Annualized Premium. Source: Laevitas
The chart shows traders flirting with the neutral sentiment between February 19th and 24th as bitcoin price stayed above $23,750. However, the indicator failed to break into the neutral to bearish 0% to 5% zone amid additional regulatory uncertainty, particularly following Gensler’s comments on Feb. 23. As a result, it became clear that professional traders were not happy with Bitcoin price breaking above $25,000.
Related: Is the SEC’s Action Against BUSD More About Binance Than Stablecoins?
Weak economic data shifted control to the bulls
Since February 25, bitcoin price is up 4.5%, suggesting that the impact of regulatory news flow has been limited. More importantly, the global stock market reacted positively on February 27 after the US Department of Commerce reported a 4.5% mom drop in January durable goods orders. This data added pressure on the Fed to start scaling back its rate hike program sooner than expected.
With Bitcoin’s 50-day correlation to S&P 500 futures currently at 83%, cryptocurrency traders are more inclined to support risky assets’ gains over the week. A correlation indicator above 70% indicates that both assets are moving in tandem, meaning that the macroeconomic scenario is likely to play a crucial role in determining the overall trend.
Barring additional pressure from regulators or conflicting economic data, the odds for Bitcoin bulls are paramount given BTC futures and Asian stablecoin metrics.
The views, thoughts, and opinions expressed herein are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article does not contain any investment advice or recommendation. Every investment and trading move involves risk and readers should do their own research when making a decision.
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