Bitcoin traders have been experiencing sustained downward pressure on the cryptocurrency’s value, following a 5.5% drop on March 7. The decline in BTC value can be attributed to a combination of higher odds of further interest rate increases by the US Federal Reserve, and ongoing regulatory pressure in the cryptocurrency industry.
The inverted bond curve has also added to this pressure, with the longer-term dated yields stalling at 4%, while two-year treasury notes traded above 5% yield in March. This curve distortion is typically seen as a sign of economic downturns.
BlackRock, the world’s largest asset manager, has projected an increase in the US federal funds to 6% and believes that the Fed will keep interest rates high for an extended period to slow the economy and reduce inflation to near 2%.
However, there are growing concerns about cryptocurrency regulation. The Biden administration reportedly wants to apply the wash sale rule to crypto, putting an end to a tax-saving strategy frequently used by traders. Furthermore, the Public Company Accounting Oversight Board, backed by the US Securities and Exchange Commission, has recently warned investors about proof-of-reserves reports that auditing firms are sending out.
Margin markets provide insight into how professional traders are positioned, as they allow investors to borrow cryptocurrency to leverage their positions. The current margin lending ratio, at 16, is neutral. Previously, it had been difficult to find a ratio above 40, which has been the norm since February 22. This high borrowing cost for stablecoins of 25% per year was partially responsible for this anomaly, which has now returned to a neutral-to-bullish state.
Options markets provide further insight into investor attitudes. Traders should analyze them to understand if the recent correction has caused investors to become more risk-averse. The 25% delta skew is a useful metric that compares similar call and put options, turning positive when fear is prevalent because the premium for protective put options is higher than for risk call options. The current positive 3% skew indicates a balanced demand for bullish and bearish options.
These derivatives data suggest that professional traders are unwilling to be bearish, with options traders taking a balanced view on risk. Meanwhile, the margin lending ratio indicates that the market is improving, even though some bearish bets remain. Given enormous downward price pressures resulting from a macroeconomic standpoint, as well as regulatory pressure in the United States, bulls in the Bitcoin market should be content that derivative markets have thus far remained robust.
In conclusion, higher interest rates by the US Federal Reserve, the inverted bond curve, and regulatory pressure have been placing downward pressure on Bitcoin. However, derivatives data suggest that professional traders are taking a balanced view on risk, with options traders unwilling to be bearish, and the margin market remaining neutral-to-bullish. Nevertheless, given ongoing macroeconomic and regulatory pressures, investors are advised to conduct their research before making any investment decisions.
