TLDR;
- There are similarities between current market conditions and the Bitcoin market in August
- Dwindling volume and greater derivatives exposure increase the odds that a significant pullback will occur
- If a pullback does occur, $14k is a level where significant buying pressure is anticipated to come into the market.
Bitcoin buyers became exhausted in August after several failed attempts to maintain prices above $12k. The exhaustion was followed by a 2-day 15% decline in price at the start of September.
However, there were several indications that a pullback was coming and we may be observing similar conditions today. Volume had dwindled over the course of August. By month-end, volume was only a fraction of its 180-day moving average.
Similarly, volume has been dwindling in recent days. The weekend may have played a role in this as recent research by CoinMetrics has highlighted that US market hours have been a more important factor for price movements this year.
However, the relationship between the derivatives market and the spot market may also be suggesting that the Bitcoin market is overheated. At the end of August, derivatives speculation played a greater role in fuelling price rises as a premium could be observed between the BitMEX perpetual contract and the spot price.
When Bitcoin firmly surpassed its Q2 2019 high on the 6th of November, this premium returned. The leveraged positions of derivatives makes the market more susceptible to downside movements as significant price drops would catalyze a cascade of liquidations.
BTC price rises in August and September were predominantly driven by healthy spot market demand as perpetual derivatives traded at a discount to the spot market. The dwindling volume and derivatives premium increase the odds that we may observe a pullback in the near-term but how the price will unfold remains uncertain.
Bitcoin could easily continue its upward trajectory given the extremely bullish sentiment surrounding the market. The Crypto Greed and Fear Index – a sentiment indicator that analyzes various metrics – is showing record high levels for bullish market sentiment.
Last week was also extremely bullish from the institutional perspective. Paul Tudor Jones, BlackRock, AllianceBernstein, and a Guggenheim Fund were all in major media outlets with positive Bitcoin developments. A $5.3 billion Guggenheim fund reserved the right to invest 10% of its total assets in Grayscale’s Bitcoin Trust.
If Bitcoin does record a significant pullback, $14k is a level where significant buying pressure would be anticipated to come in. $14k was the Q2 2019 high and price experienced resistance when it approached this level in late October. When it firmly surpassed the level on November 6th, market volatility increased as more derivatives speculators entered the market.
