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This article covers some of the recent action in the bitcoin derivatives market, as well as touches on the evolving relationship between bitcoin and the legacy financial system.
Action in global capital markets has been intense, with massive volatility across currencies, more bond selling and a brief bullish deviation for bitcoin, which excited the bulls.
As bitcoin retreated above $20,000, there was some talk of a potential decoupling, as bitcoin rose more than 7% while US stock markets fell about 4 % during the last week. While we would certainly like to see a time when bitcoin finds relief during an increasingly tumultuous environment in the legacy financial system, we remain skeptical of such an outcome in the near future as the data simply does not support it.
Some people took this chart to mean that bitcoin was decoupled from stocks
We cannot stress enough that the current bitcoin trading environment is less about bitcoin itself and more about the dollar. As cross-maturity and cross-currency yields rise, the value of global assets collapses in tandem, which will subsequently lead to a day of reckoning where everything is sold in tandem.
As we like to say, the everything bubble is popping as the underlying asset, the US Treasury, continues to bleed.
Let’s go back to bitcoin for a moment. Since when was the period of superior performance, and can we expect more soon?
The simple answer is that the type of buying that was taking place (long positions in the bitcoin futures market) is never sustainable in nature.
An increase in open interest led to an increase in the price of bitcoin
Tens of thousands of bitcoin net buys became net sellers within hours as the surge in open interest that drove the market price up quickly went underwater.
Tens of thousands of net buying bitcoins became net sellers within hours
Our belief regarding the bitcoin derivatives market and its view of the state of the market cycle is as follows:
When the variable interest rate is significantly negative, the weight of the spot sale and de-leveraging has occurred. The variable interest rate of the perpetual futures complex can give us an idea of whether the bulls or bears are too aggressive.
When the funding rate is significantly negative, it can be due to both closing long positions that drive the price below the spot market and aggressive short positions that drive the price down. Funding rates in today’s market environment are much more muted than the craziness seen in 2021.
Funding rates in today’s market environment are much more muted than the craziness seen in 2021
Our expectation is that volatility in legacy markets will lead to a large liquidation of bitcoin derivatives, driving the price below spot markets, as short traders pile in. This would be seen by a drastically negative perpetual futures funding rate (variable interest rate that incentivizes traders to settle at prices close to the spot market rate).
We haven’t seen that, in terms of the level where the markets bottomed out in 2020 and 2021.
The market is not there today, in our estimation.
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