The Bitcoin (BTC) price is down 23% in eight days after failing to break the $ 45,000 resistance on February 16. The bottom of 34,300 dollars came on February 24 after the escalation of the Russian-Ukrainian conflict, which led to a sharp sale of risky assets.
While Bitcoin reached a 30-day low, Asian stocks also adapted to the worsening conditions, as evidenced by Hong Kong’s Hang Seng down 3.5% and the Nikkei which also reached a 15-month low.
Bitcoin / USD on FTX. Source: Trading View
The first question to be answered is whether cryptocurrencies overreact compared to other risky assets. Of course, Bitcoin’s volatility is much higher than in traditional markets, at 62% annually.
In comparison, the US stock market index Russell 2000 for small and medium-sized companies has annual fluctuations of 30%. Meanwhile, according to the MSCI China Index, Chinese equities account for 32%.
Bitcoin / USD (purple, left scale) vs Hang Seng (blue) and Russell 2000 (orange)
There is a significant correlation between Bitcoin, the Hang Seng Stock Exchange and the Russell 2000 Index in the United States. One possible explanation is the tightening of the US Federal Reserve target. By reducing bond repurchases and threatening to raise interest rates, the money authorities have triggered a “journey to safety”.
Despite the lack of a 7.5% inflation-adjusted return, investors often seek protection in cash positions in US dollars and government debt. This is especially true in times of great uncertainty.
Bitcoin futures traders trend moderately lower
To understand how professional traders are positioned, one should keep an eye on Bitcoin derivatives. Bitcoin futures contracts must have an annual premium of 5% to 12% to compensate traders for having funds two to three months before the contract expires.
Plus 3-month bitcoin futures contracts. Source: Laevitas
Levels below 5% are very bearish, while annuities above 12% are considered bullish. As shown above, the futures premium fell below 5% on February 9, indicating a lack of confidence in professional traders.
Although the current 2.5% is the lowest since July 20, this date is a reversal after a 74-day price correction. In fact, this event was followed by an increase of 71%, which confirms the hypothesis that the futures premium is an indicator aimed at the past.
BTC / USD (blue) and 30-day correlation with Russell 2000 (purple). Source: Trading View
Note that the correlation between the Bitcoin and Russell 2000 indices was relatively high on July 20th. However, this situation changed rapidly when BTC started the upswing independent of the traditional markets.
The bottom can be reached, but the uncertainty can lead to further decline
As with the futures premium, the correlation indicator uses historical data, so it should not be used to predict a trend reversal. Investors, especially professional fund managers, tend to avoid highly volatile assets in volatile markets.
An understanding of market psychology is crucial to avoid unexpected price fluctuations. As long as bitcoin remains a risky resource for market participants, these short-term corrections should be the rule, not the exception.
Therefore, it makes sense to wait for more signals about the conclusion before predicting a Bitcoin bottom.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risk. You should do research when making a decision.
