Bitcoin’s $43K Flirtation: Low Confidence Among Traders

The price of Bitcoin has been facing difficulties as it struggled to maintain its support at $43,000. This setback was influenced by Jerome Powell, the Chair of the U.S. Federal Reserve (Fed), who pushed back on market expectations for interest rate cuts in the near future. This lack of interest from leverage longs in BTC derivatives markets led to speculation that Bitcoin could potentially decline to $40,000.

In an interview on Feb. 4 with 60 Minutes, Powell clarified that the central bank committee needs more confidence in the inflation rate reaching the 2% target before taking action. While Powell expressed positive feelings about the economy, stating that it’s “in a good place,” he mentioned the possibility of three quarter-point rate cuts this year based on official projections, depending on the behavior of the job market. This contradicted investors’ expectations of interest rate cuts starting in March.

Bitcoin’s price pressure was further exacerbated by an essay from Minneapolis Fed President Neel Kashkari on Feb. 5, suggesting that the monetary authority might take time before reducing interest rates. Kashkari argued that the current stance of monetary policy may not be as tight as believed, citing ongoing economic growth and low unemployment. Fixed-income investors were concerned about the Feb. 3 labor market data, which challenged the Fed’s efforts to curb inflation. The 2-year U.S. Treasury yield hit its highest level since Dec. 13, 2023, signaling diminished confidence in potential interest rate cuts.

Bitcoin also faced additional negative pressure due to various risk factors, including the distribution of 142,000 Bitcoin to creditors by the bankrupted Mt. Gox exchange and the struggles of failed crypto lender Genesis. The macroeconomic impact of the Fed’s decision to keep interest rates above 5.25% also posed potential risks to investor perception.

The spot exchange-traded fund (ETF) flows of Bitcoin also added to these concerns. While some market participants believe that Bitcoin’s price has been sustained primarily by inflows from BlackRock’s iShares Bitcoin Trust and Fidelity’s Wise Origin Bitcoin, GBTC experienced significant outflows in January.

Bitcoin derivatives display a neutral demand for leverage longs, as the futures contracts have been trading at a slight premium to spot markets. This indicates that sellers are asking for more money to delay settlement. Bitcoin futures have shown resilience and have not reacted adversely to the retest of the $39,000 support on Jan. 23.

Further analysis of Bitcoin options data suggests a growing demand for put options compared to call options, indicating a focus on neutral-to-bearish price strategies. Since Jan. 24, the ratio has consistently favored call options, suggesting that BTC investors are not turning bearish.

Bitcoin derivatives data indicate a reluctance to take bullish positions, but there is no indication that Bitcoin’s price will weaken to $40,000. Despite the current challenges, the potential benefits of Bitcoin’s scarcity and its ability to navigate sanctions still remain.