According to 10x Research: Bitcoin's recent break above $57,000 has signaled a potential tactical bottom, offering a promising risk/reward scenario despite ongoing concerns due to weak economic data. Monday's sharp -18% intraday drop underscored the dangers of attempting to catch a falling knife. However, Bitcoin's move to establish a base within the $55,000 to $57,000 range has attracted significant attention from traders.
The market has been highly active, with substantial buying activity observed over the past 24-36 hours. Tether has minted $1 billion, Circle has minted $1.6 billion, and Binance has reported $2.4 billion in inflows since the market drop on August 5. Additionally, a US judge approved FTX's repayment of $12.7 billion to creditors, potentially redirecting a significant portion back into crypto by December. Bitcoin also closed the CME gap at $63,000, open since the market drop on August 5.
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As institutions increasingly enter the Bitcoin market, volatility has gradually decreased. Institutions often act as sellers of volatility, selling puts and calls to generate yield. The SEC is expected to approve Bitcoin ETF options by September 21, potentially launching later in Q4. This could attract market makers and provide traders with new opportunities for directional bets.
Over the past two months, 30-day realized volatility has more than doubled, culminating in a significant spike in implied volatility on Monday. This volatility presented traders with opportunities, such as buying inexpensive put options when volatility was low and shifting positions to call spreads to profit from a rising BTC price and a likely decline in volatility.
Despite being oversold on Monday, markets did not rebound immediately. However, a significant short-cover rally occurred on Thursday following a lower-than-expected number of jobless claims, a strong indicator for the monthly US employment report. The market remains highly sensitive to economic data, showing volatility around employment and economic growth reports.
Last week's weak ISM Manufacturing PMI heightened recession concerns, though these were somewhat alleviated by the ISM Services PMI rebounding above 50. From an economic cycle perspective, a sudden acceleration of the economy is unlikely amid US election uncertainty. There is, however, a scenario where countries might restock ahead of the election, fearing potential tariffs from Trump.
The likelihood of the US economy and labour market weakening this fall remains high, with better economic data suggesting reduced Fed stimulus. Next week’s inflation report (August 14) could have negative implications if it exceeds the previous 3.0% figure, keeping volatility elevated.
Liquidations exceeding $300 million often indicate local, tactical bottoms, though caution is advised for long-term positions. The recent liquidation of $622 million resulted in significant losses for many traders. If the funding rate stays near or below zero, it signals that futures traders are not currently driving the market, unlike during the February 2024 run-up to all-time highs.
Futures liquidations, while smaller than during the 2020/2021 bull market, recently signaled that many short positions would be stopped out, leading to Bitcoin moving above $57,400 and sparking a short-cover rally.
Volatile periods often revive FOMO during rallies and panic during crashes. However, the macroeconomic conditions necessary for a significant price spike are currently absent. The market is particularly sensitive to GDP data, with the upcoming print on August 29 likely to influence Bitcoin's volatility.
From a seasonal perspective, Q3 is typically the most volatile and challenging quarter for trading. Despite optimism around Bitcoin Spot ETFs in the summer of 2023, Bitcoin saw a sell-off into mid-September before staging a significant rally in Q4.
In this environment, a tactical approach that prioritizes early profit-taking and disciplined risk management is essential. Incorporating options could help manage FOMO and mitigate risks, especially as markets can quickly reverse with the emergence of new narratives. After the $57,000 breakout, it may be prudent to wait for another high-risk/reward opportunity rather than rushing into new, long-term positions.