Bitcoin correction may be painful, but here are 9 signs the market is too bearish, and we’re close to a bottom
In our crypto note to clients last Wednesday, we highlighted that this sell-off could set Bitcoin up for a new all-time high. But we also pointed out that we thought the “market may need to get a little more bearish first.” Bitcoin has since moved about 15% lower from $50k to near $42k today. It’s hard to time short-term bottoms, but if we had to bet, here are 9 reasons we think we’re close to one:
1) Bitcoin feels like it’s falling apart but this type of correction is normal during bull markets
Bitcoin is down ~30% from its prior ATH. Compared to traditional market volatility this seems like a bear market, but during crypto bull market runs this has been par for the course. Bitcoin had several similar pullbacks during its march to 2017 highs and this is the third pullback of over 25% during this 2021 run.
Source: Tradingview
2) Highest level of shorts on Bitfinex since November 2020 before market went parabolic
Few investors were willing to short Bitcoin during the market run up and range bound consolidation we’ve seen since February, but that’s changed with the recent sell-off. Bitfinex short interest has spiked and hasn’t been this high since Nov 2020 before we went parabolic. We realize this is only one exchange, but we think this is illustrative of the broader market sentiment.
Source: Datamish
3) Bitcoin borrowing rates have moved higher up to 15% on FTX
Bitcoin lending rates have been flat for recent months and recently spiked to 15% on FTX implying high short borrow demand (we think again indicative of market sentiment).
Source: FTX
4) Futures open interest signals higher margin leverage (possibly to the short side)
Futures open interest in USD terms has fallen ~10% from $20B to $18B over the last week vs. ~30% for the price, implying increasing contracts and margin leverage.
Source: Skew
5) Futures curve has come in and flattened substantially
The futures curve has come in and flattened substantially with 3-month basis now ~10% annualized above the spot vs. ~50% (!!) back in mid-April, implying traders are requiring less of a premium to take the short side of the trade.
Source: Skew
6) Funding rates are negative on several exchanges
Futures funding rates are negative on several exchanges implying traders are biased to the short side.
Source: Skew
7) Looking for liquidations if spot gets moving higher
Despite the increasingly bearish bets, we’ve only seen spikes in liquidation top out around $300M, which is relatively tiny vs. the $4B deleveraging we saw back in April, implying this could be a catalyst for going the other way (higher).
Source: Skew
8) Bitcoin VIX says crypto investors are nearly as afraid of what Elon Musk might do in response to Twitter trolls as they are of what the Fed might do in response to bond market inflation fears – market is too bearish on Bitcoin
We’ve seen the Bitcoin VIX run up from recent lows of around 75 to 123 currently – that’s nearly as high of a move as we saw during the January market meltdown when investors were afraid the world was falling apart because of the 10Y rate rise.
Source: T3 Index
This says crypto markets are nearly as afraid of what Elon Musk might do in response to Twitter trolls as they are of what the Fed might do in response to bond market inflation fears.
Source: Twitter
While Elon Musk is certainly a powerful billionaire, we don’t think the risk of him dumping his Bitcoin should be as concerning as the fed raising rates – we think this is a sign the market is now too bearish on Bitcoin.
Source: The Verge, PBS
9) High yield credit and S&P saw bounces from recent selloffs, and a Bitcoin bounce may follow
Fundamental macro picture remains intact, and we remain bullish through the balance of the year. High yield markets and the S&P, which also sold off last week, have started to recover which could bode well for risk on assets like Bitcoin.
Source: Tradingview
Have we bottomed already, do we bottom tonight, or do we bottom tomorrow? I’m not sure. Markets usually bottom on Tuesdays (helpful hint from Tom Lee). Either way, we don’t know the future, but we think odds are we’re close to the bottom and don’t want investors to “panic sell” here.
We still think ETH and other ALTs outperform BTC over the balance of the cycle, but we wouldn’t be surprised by a temporary rotation during a Bitcoin move higher.
