Bitcoin Lags as Unwinding of ‘Fed Trade’

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As the popular macro trades of 2002 unwind, risk has returned to traditional markets, causing Bitcoin to trade at a deep discount to its 200-day moving average. Since the beginning of 2022, selling risk assets such as U.S. stocks and bitcoin (BTC) and buying the U.S. dollar against the Japanese yen (JPY) have been among the most popular macro bets, unless of course you’ve been living under a rock.

The peak inflation narrative and the central bank’s hints at moderation in liquidity tightening from December onward have caused investors to reevaluate their commitment to these so-called hawkish Federal Reserve (Fed) trades and pile back into risk assets, with the exception of bitcoin, in recent weeks.

Since early April, the S&P 500, Wall Street’s benchmark equity index, has gained 16%, allowing it to trade above the widely followed 200-day moving average. A common turbo bet on Fed policy and U.S. rates, the USD/JPY pair has fallen 11% to its 200-day moving average. When measured against other major fiat currencies, the Dollar Index has fallen below its 200-day moving average.

Yields on U.S. government bonds have dropped significantly from annual highs, lending credence to the peak inflation story and the ensuing risk revival in financial markets.

Bitcoin, on the other hand, appears to be unrelated to broad economic trends and established markets. Market leader Bitcoin was trading at $17,340 at press time, a discount of 22% from its 200-day moving average.

This demonstrates that the FTX bankruptcy occurred at the worst possible time for bitcoin and the cryptocurrency market as a whole.

Bitcoin

“There has been a strong correlation between (American) stock prices and cryptocurrency prices over time. Bitcoin’s price could have been $29,000 today instead of $17,200 (or 69% higher) if the FTX implosion hadn’t happened “Matrixport’s head of research and strategy, Markus Thielen, made that claim.

Thielen remarked that such prices would be possible “if the market can move on from FTX.”

The price of bitcoin hit a new low of $15,480 last month, a drop of nearly 40% from the previous high.

After rising by almost 20% in the first nine months of the year, the dollar index reached its peak at the end of September and has since declined. The S&P 500 hit rock bottom around the middle of October, shortly after the dollar began its downward trend.

The aftermath of FTX’s bankruptcy is fading

Recent market activity for bitcoin indicates that FTX’s insolvency may have passed its worst. Despite major crypto lender BlockFi filing for bankruptcy protection, the leading cryptocurrency rose by 4% last week.

A recent moderation in negative sentiment in the options market is one indicator that the overhang of bad news in recent weeks is having less of an impact on crypto performance, even if the full context of the uncertainty hasn’t been completely priced in, as noted by Coinbase Institutional in its weekly note.

The one-month call-put skew for Bitcoin has improved to -9% from the low of -29% on November 13. This metric measures the premium investors demand to purchase OTM calls as opposed to OTM puts.

Both put and call options provide coverage against declines and increases in price, respectively.

The uptick in confidence levels may indicate that the worst of the panic is over. This means crypto investors can now look to the reset of risk in traditional markets and the improved macro backdrop as opportunities.

Given that the United States economy is on the verge of entering a recession, one may wonder if the recent risk revival in traditional markets will prove to be sustainable. Consecutive quarterly declines in the growth rate are not an encouraging sign for risk assets.

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On the other hand, macro trader Geo Chen has found that a recession may turn out to be a lucky break.

As Chen pointed out in a Substack post on November 22nd, “the Fed is over-tightening into a recession that has likely already started,” and this will likely lead to a downtrend in inflation that will be more persistent than many expect.

Yields and inflation have been the primary factors influencing asset prices this year, so a decline in yields should be beneficial for the market in the coming year, said Chen.

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