The price of Bitcoin (BTC) surpassed $25,000 on February 21 with a 53% year-to-date gain at the time, it made sense to expect the rally to continue after the previous week’s US retail sales figures far exceeded market consensus. This fueled investors’ hopes for a soft landing and possible reluctance to recession in the US economy.
The culmination of the success of the US Federal Reserve’s strategy would be to raise interest rates and reduce balance sheet reduction by $9 trillion without significantly damaging the economy. If this miracle happens, the outcome will benefit risky assets including stocks, commodities and bitcoin.
Unfortunately, the cryptocurrency markets took a hit after rejecting the $25,200 level, with the price of Bitcoin dropping 10% between Feb 21 and Feb 24. Regulatory pressure, mainly from the US, partly explains investors’ rationale for deteriorating market conditions.
In a Feb. 23 interview with New York Magazine, Securities and Exchange Commission (SEC) chairman Gary Gensler stated that “anything other than Bitcoin” is potentially a security instrument and falls under the agency’s jurisdiction. However, many lawyers and political analysts have stated that Gensler’s opinion “is not law”. As such, the SEC had no authority to regulate cryptocurrencies unless it could prove its case in court.
In addition, at the G20 meeting, US Secretary Janet Yellen stressed the importance of implementing a strong regulatory framework for cryptocurrencies. Yellen’s Feb. 25 remarks came after International Monetary Fund (IMF) managing director Kristalina Georgieva pointed out that “if regulation fails” then an outright ban “should not be taken off the table.”
Let’s take a look at Bitcoin derivatives indicators to better understand how professional traders are positioned in the current market conditions.
Demand for stablecoins in Asia is stagnating
Traders should refer to the USD Coin (USDC) premium to measure demand for the cryptocurrency in Asia. The index measures the difference between Chinese peer-to-peer stablecoins and the US dollar.
Excessive demand to buy cryptocurrency may put pressure on the above-fair ratio at 104%. On the other hand, the stablecoin market offer is flooded during declines, resulting in a 4% or higher discount.
After peaking at 4% at the end of January, the USDC premium index in Asian markets fell to a neutral 2%. Since then, the ratio has stabilized at a modest 2.5% premium, which should be interpreted as positive given the recent regulatory FUD.
BTC Futures Bonus Stuck Even After Price Rejection at $25,000
Quarterly Bitcoin futures contracts are the preferred instruments of whales and arbitrage bureaus. Due to their settlement date and price differential from the spot markets, they can seem complicated to retail traders. However, their most noticeable advantage is the lack of a variable funding rate.
These month-specific contracts tend to trade at a small premium over the spot markets, indicating that sellers are asking for more money to hold settlement longer. As such, futures markets should trade at an annual premium of 5% to 10% in sound markets. This situation is known as contango and is not exclusive to crypto markets.
The chart shows traders flirting with a neutral mood between Feb. 19 and Feb. 24, when the Bitcoin price held above $23,750. However, the indicator failed to enter the neutral to bearish 0% to 5% area as additional regulatory uncertainty was added, especially after Gensler’s Feb 23 remarks. As a result, it became clear that pro traders were not comfortable with Bitcoin going above $25,000.
Related: Is the SEC action against BUSD more about Binance than stablecoins?
Poor economic data shifted control to the bulls
Since February 25, the price of Bitcoin has increased by 4.5%, indicating that the impact of the regulatory flow of information has been limited. More importantly, the global stock market reacted positively on February 27 after the US Department of Commerce reported that orders for durable goods fell by 4.5% in January compared to the previous month. The data increased the pressure on the US Fed to reduce its interest rate hike program sooner than expected.
With Bitcoin’s 50-day correlation with S&P 500 futures currently at 83%, cryptocurrency traders are more likely to support risky asset prices rising during the week. A correlation rate above 70% indicates that both assets are moving in tandem, meaning that the macroeconomic scenario is likely to play a key role in determining the overall trend.
Unless there is additional pressure from regulators or conflicting economic data, the odds favor Bitcoin bulls given BTC futures and Asian stablecoin indices.
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This article does not contain investment advice or recommendations. Every investment and trading move involves risk and readers should do their own research when making decisions.