Interest rates

The sale of Bitcoin induced by options, but also by interest rates and Fed policy

Bitcoin’s weekend liquidation and subsequent rebound illustrates the volatility of the crypto market, but also its growing connection to traditional asset classes.

Between late Friday night and early Saturday morning, the price of bitcoin fell more than 20%, trading as high as $ 42,000 at one point. As of Monday afternoon, it had recouped some of those losses and was trading on Tuesday afternoon around $ 50,528, according to CoinDesk. It was still down from $ 53,670 on Friday afternoon, and about 27% below its high of $ 68,990 set in November.

Some of the latest massive sell-offs were due to sell-offs on option exchanges, investors said. But it was also prompted by concerns about interest rates, market risk and Federal Reserve policy, they said, issues that are causing several days of stock tipping and ditching. ‘other markets.

“There is a correlation between the most active and risky stock indexes, like the Nasdaq, and the crypto market,” DailyFX analyst Nicholas Cawley said. A few years ago, he said, the connection wasn’t as strong.

Bitcoin has become a more widely held investment over the past couple of years. About 26% of U.S. investors have crypto holdings, according to a survey of around 1,000 investors from Grayscale Investments. When he conducted the same survey two years ago, he did not indicate how many respondents had bitcoin, instead focusing on how many people were open to the idea.

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This year, investors invested $ 9 billion in crypto funds, asset management firm CoinShares reported, up from $ 5.6 billion in all of 2020. Assets under management for those funds have increased. from $ 18.8 billion to $ 73 billion in 2020.

These funds attract a more professional trader than spot exchanges or mobile apps, and reflect the changing nature of crypto investors.

The link is also clear in the movements of bitcoin and major indices. Like the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, the price of bitcoin hit a low in March 2020 after the coronavirus pandemic. It started to rise again, just like stocks, after the Fed and other central banks began to aggressively cut interest rates and pump trillions of cash into capital markets. This has made risk assets much more attractive to investors compared to bonds that are safer but less profitable.

Last week Federal Reserve Chairman Jerome Powell

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told lawmakers the central bank was ready to speed up the withdrawal of its easy money policies and raise interest rates sooner than expected. Higher interest rates make risky assets like bitcoin less attractive.

Shares were volatile after Mr. Powell’s comments, but didn’t lose too much value. The Dow Jones fell less than 1% for the week, while the Nasdaq fell about 2.6%. Bitcoin, which typically posts larger gains and losses than stocks, fell around 8% last week, with most occurring on Friday.

Trading in the shares, however, ends at 4 p.m. ET on Friday. Bitcoin exchanges never close. “The weakness in prices at the end of the week continued into a less liquid weekend session,” said NYDIG, a New York-based trading and asset management firm.

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The hours between the end of Friday and Saturday represented a “toxic combination of low liquidity, excessive debt and overconfidence,” said Mr. Cawley of DailyFX. Once the price of bitcoin fell below a certain support level – around $ 53,000, he estimated – traders began to be liquidated from their positions.

There has been a sharp increase in option contract closeouts, according to research firm Coinglass. About $ 2.5 billion of options were liquidated on Friday, against $ 162 million the day before, including $ 2.1 billion from “long” bets, or options whose price corresponds to a rise in bitcoin . About 6.4% of offshore leveraged positions were liquidated in a 24-hour period from Friday to Saturday, according to NYDIG, the largest since around 28% of open interest was liquidated in a massive sell-off. in April.

“It was kind of a perfect storm,” Cawley said of the combination of factors that weighed on bitcoin.

Sales like this are to be expected, said Mati Greenspan, founder and CEO of crypto-focused research firm Quantum Economics.

“These types of pullbacks are an integral part of an increasingly risk-hungry market,” he said. But it’s surprising – at least for crypto investors – that bitcoin is following stocks, he said, as it and other crypto assets have been touted as alternatives to central bank-run capital markets. .

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“The more I think about it, the more this apparent close correlation between crypto and stocks really bothers me,” he said.

Write to Paul Vigna at [email protected]