The current state of bitcoin has become increasingly precarious, with online options platform Derive.xyz indicating that the probability of the cryptocurrency ending the year below $90,000 has risen to 50%. Market sentiment is shifting as traders engage in hedging strategies against further declines, a response to the currency’s significant drop in value.
Bitcoin recently fell 4.2% to $86,681.41, hitting a seven-month low, well below its all-time high of $126,223.18 reached in early October. Since the beginning of the year, it has experienced a decline of more than 7%, on track to face its first annual drop since 2022. Analysts warn that the cryptocurrency has slipped below both its 50-day and 200-day moving averages, leading to diminished interest among trend-following investors.
Sean Dawson, head of research at Derive.xyz, expressed concerns about the current market dynamics, emphasizing a lack of positive catalysts to drive prices up. He highlighted the diminishing impact of previously favorable conditions, such as low interest rates, which have failed to sustain upward momentum for bitcoin. Dawson also noted a staggering $8.25 billion in crypto-related liquidations in the past 30 days, affecting both long and short positions.
The reluctance of several Federal Reserve officials to suggest further interest rate cuts, amidst ongoing inflationary pressures, has contributed significantly to bitcoin’s downturn, creating a ripple effect on other risk assets, including stocks. Dawson cautioned that heightened volatility in technology valuations could result in bitcoin’s price dropping to $75,000 by year-end, although he anticipates a swift recovery from that level.
In the options market, there is notable activity surrounding “puts,” with about 13,800 contracts allowing the right to sell bitcoin at a strike price of $85,000 set to expire on December 26. This strategy reflects a strong demand for downside protection among traders anticipating a further drop below this level.
Conversely, some market analysts remain optimistic about a potential rebound for bitcoin. Sean Farrell, head of digital asset strategy at Fundstrat, pointed out that current market conditions may offer a more balanced risk-to-reward outlook. He identified bitcoin’s recent dip below $90,000 as a “potential value zone” that could entice buyers, especially as oversold signals begin to emerge. The sell-off has reportedly cleared the market of sellers who were motivated by urgency.
Despite this hope, other indicators in the options market signal bearish trends. The call-put skew, which illustrates market sentiment based on implied volatility between call and put options, has notably deteriorated. A shift from -2.9% to -5.3% in the 30-day put skew reveals an increasing tendency for traders to seek downside insurance as bitcoin prices weaken. Furthermore, options volatility has surged, with 30-day implied volatility rising from 41% to 49% in just two weeks.
Jack Janasiewicz, a portfolio manager at Natixis Investment Managers Solutions, has adopted a bearish stance based on bitcoin’s utility and ongoing mass adoption, despite acknowledging its growing acceptance among institutional investors. He questioned the practicality of using bitcoin for everyday transactions while suggesting that a small percentage allocation to the cryptocurrency could serve as a safeguard against potential gains.
In this uncertain environment, the future trajectory of bitcoin remains under scrutiny as traders and analysts navigate the complexities of market sentiment and external economic factors. With the cryptocurrency landscape in flux, many are left wondering how this will unfold in the coming months.
