Key Considerations for Profitable Bitcoin Traders Right Now

👇1-14) Many attribute the Bitcoin sell-off to the unwinding of the Japanese carry trade, but the reality is more complex. Bitcoin has been vulnerable since mid-March, and despite a 15% rally in the Nasdaq and a 10% weakening of the Japanese Yen during this period, Bitcoin has remained range-bound. The carry trade relied on sustained high US interest rates, unlikely to persist. The game has changed.

👇2-14) In the past 24 hours, crypto markets recorded a trading volume of $244 billion, the highest since March 6. Bitcoin experienced significant intraday liquidations on that day after reaching a new all-time high. Although we were very bullish in February and early March, we adopted a cautious stance following the substantial decline, as our backtest suggested an unpredictable market ahead. In hindsight, this was the correct decision.

Crypto Trading Volumes ($244 billion) vs. Bitcoin

👇3-14) Financial markets are like puzzles that need to be reassembled periodically, with new drivers of asset prices emerging. This is one of those times. Unlike the sharp declines in April and June mitigated by increased leverage, such a reversal may not occur this time.

👇4-14) The initial wave of Bitcoin ETF buying halted a few days later, in mid-March, when concerns over the higher CPI print led the macro community to fear another Fed rate hike. We quickly noted that, despite the intense Bitcoin ETF buying, it was likely arbitrage funds purchasing the ETF while shorting futures. Nevertheless, the signaling effect drove prices higher until the March 6 volatility spike.

👇5-14) Those hedge funds have probably sold their positions to retail investors, who are unlikely to cut losing positions, ETF buying has only marginally resumed. More interestingly, the stablecoin fiat-to-crypto onramp has stopped since Bitcoin halved on April 20. The media hype around the halving initially drove interest, which then waned.

👇6-14) Consequently, the marginal price setter has seen fluctuations in futures leverage. The era of 100x leverage may be over, but significant leverage trading persists, enhancing returns - or accelerating losses. Exchanges profit from liquidating users and the financing costs of providing leverage. This year, we've observed three waves of leverage increases.

👇7-14) The first wave coincided with the run-up to the new all-time high in March, driven by declining sell flow from the Grayscale Bitcoin ETF in late January and a lower PCE inflation print at the end of January. Although we turned cautious in early January, by late January, we suggested that the drop to $40,000 offered a great buying opportunity with a price target of $70,000.

👇8-14) Bitcoin dropped to $56,500. However, the second wave started on May 20, when the SEC indicated that Ethereum ETFs would soon be approved. Bitcoin rallied back above $70,000, despite falling to $53,500 a few weeks later due to concerns over German Bitcoin selling.

👇9-14) The third wave began in early July after the German Bitcoin selling ended. The market then focused on lower inflation prints, which opened the door to potential rate cuts. This momentum sparked another attempt at $70,000.

👇10-14) During the April and June sell-offs, the dollar amount of liquidations remained relatively low despite leverage futures traders driving prices higher. With no new money entering the crypto market, as the flat stablecoin market cap indicated, it became a zero-sum game among traders until some incurred losses due to excessive leverage.

👇11-14) This recent sell-off has caused significantly more liquidations than those in April and June, substantially reducing the 'leverage' pool. Consequently, this should curb traders' willingness to take risks, even if prices experience a slight rebound. Additionally, while liquidations are small compared to the 2021 bull market, they seem significant due to the lack of new money entering the crypto market.

Bitcoin and Ethereum Futures Liquidations ($622 million) vs. Bitcoin

👇12-14) Last night, macro concerns took a backseat as the ISM Services index showed improvement. However, like the ISM Manufacturing index, rising prices indicate the Fed faces a dilemma: either support the employment market with rate cuts or continue its fight against inflation. Perhaps Powell aims to be remembered as an inflation fighter. Cutting rates and providing stimulus now could tarnish his legacy, as increased stimulus would likely drive inflation back up.

👇13-14) As traders, we often take maximum or even leveraged long positions. We must wait for these opportune moments and cannot suddenly claim to have an infinite time horizon to justify ignoring 'short-term' volatility. Risk management is crucial during such periods to protect trading capital. August and September are notorious for slow trading. Many institutional players are on vacation, and deploying large amounts of capital is the last thing on their minds. Opportunities will likely arise once this period ends.

👇14-14) This approach distinguishes institutions from retail traders, who often chase every opportunity, while institutions carefully assess risk and reward. While buying the dip can sometimes be a sound strategy, it remains too risky now.