Bitcoin’s price volatility was the main focus of attention in the past week as the cryptocurrency and stock markets reacted to newly released US economic data. The sudden increase in Treasury yields was followed by a sharp correction in the price of Bitcoin, as well as in the DOW and S&P 500.
Looking beyond traditional finance markets, Bitcoin’s rally above $102,500 on January 6th led technical traders to believe that a bearish head-and-shoulders pattern had been invalidated and that the possibility of a price dip below $90,000 had been avoided. Alongside the negative impact of rising Treasury yields, rumors circulated that the US Department of Justice had received court approval to sell $6.5 billion worth of Bitcoin that had been seized from Silk Road. These rumors added to the bearish sentiment in the market.
Tony Stewart, a popular options trader, shared his view on how intelligent traders would react to the news, stating that bears would push the narrative lower until momentum repels.
Among crypto traders, there is a unique strategy for interpreting sentiment data and unconfirmed bearish events to one’s advantage. On January 9th, which was a national day of mourning for former US President Jimmy Carter, all traditional finance markets were closed. This meant that there was no buying or selling of spot Bitcoin ETFs, leading to reduced volumes and the potential for traders to capitalize on smaller flows that day.
Bitcoin was already in a weak position, which further amplified the opportunity for traders to push prices lower and possibly buy spot Bitcoin. This means that large traders could open short positions to liquidate those who had long positions at recent lows, while also buying spot coins elsewhere and potentially hedging in options markets.
The news about the US Department of Justice and the Silk Road Bitcoin liquidation approval, along with the surrounding media and FUD (fear, uncertainty, and doubt) spread by Crypto Twitter “influencer analysts,” amplified the bearish narrative in both the equities and crypto markets. This provided an opportunity for traders to reposition themselves in derivatives markets and capture discounted spot Bitcoin before the expected rally when President-elect Trump is inaugurated on January 20th.
Brian Russ, the chief investment officer of 1971 Capital, shared his perspective on how he and his firm were digesting the news and price action of the week. He mentioned the difficulty of defining the exact path due to various factors and the presence of many large global players in the market. He also highlighted the dominance of derivatives in daily Bitcoin flows, making it harder to manipulate the market compared to the previous cycle.
Regarding the impact of the closure of TradFi-linked Bitcoin trading volumes on January 6th, Russ explained that ETFs only represent a small portion of the daily average volume, so it was not a significant factor. He also noted that the Silk Road Bitcoin, worth $6.5 billion, could be significant if sold all at once but believed that the market had already priced in those sales and that they could be sold over-the-counter by Coinbase without moving the price materially.
Considering the potential for speculators to exploit light liquidity zones and bearish news headlines to move the price, Russ stated that large speculators would opportunistically manipulate prices around key stop and leverage levels, leading to increased volatility. Therefore, he advised traders to set limits now as dips are likely to be short.
Traders generally agree that bearish crypto headlines tend to have a greater impact on price than the actual events themselves, as markets tend to price in events once the initial shock wears off. As an example, Pear Protocol founder and former equities trader HUF mentioned a strategy of buying the dip when the DOJ coins move to Coinbase Prime, as the coins are likely already sold and just being transferred.
Please note that this article does not provide investment advice or recommendations. Readers should conduct their own research before making any investment or trading decisions.