2022-5-21 00:30 |
The bitcoin derivatives landscape plays a major role in the bitcoin price in the short term. We have yet to see signs of a bitcoin macro bottom.
The below is an excerpt from a recent edition of Bitcoin Magazine Pro, Bitcoin Magazine's premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.
While it is clear today that the dominant driver in the bitcoin market is its correlation to equity markets, we believe that a true decoupling will take place eventually, and the seeds of that decoupling likely could be sown in the derivatives market.
First off, a major development over the last two years has been the “dollarization” of collateral type in the derivatives market, eliminating much of the downside convexity that comes with a majority of collateral being bitcoin itself.
Futures open interest percentages with bitcoin collateralWhile a large liquidation event in the bitcoin market is less likely than March 2020 based purely on the collateral makeup in the market today as well as the positioning of the contracts (shown below), it is clear that global equity and credit markets are in free fall. With this in mind, and the reality that spot markets have absorbed a massive amount of selling pressure in recent weeks, one would be wise to keep a close eye on the derivatives market going forward.
Bitcoin price weighted by perps funding rate Final NoteThe Federal Reserve is on a mission to reverse engineer the infamous wealth effect, with the idea that falling asset prices will dampen consumer confidence and spending, and slow down the unprecedented inflation being witnessed around the world.
If global markets are headed for a breaking point, you can expect bitcoin to face steep pressure as well. What isn’t known is how many bitcoin investors/speculators are still in the market left to panic, and whether the selling that would come would be through spot markets or more predominantly through shorting via bitcoin derivatives.
In either scenario, it is likely that a horde of bottom shorters will pile on attempting to drive bitcoin into the dirt (this will be able to be seen via a deeply negative perpetual futures funding rate).
This will eventually lead to a large rebound in the price of bitcoin, and likely a decoupling/outperformance of other risk assets that have been so tightly correlated with bitcoin in recent months.
Opportunity lies ahead.
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