Bitcoin price loses steam, but futures markets forecast upside above $70K

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Bitcoin (BTC) dropped 3.3% on May 14, retesting the $61,000 support level, which was quickly defended. More importantly, this correction marked the second failed attempt within a week to surpass $63,500. Despite the less-than-optimal price action, Bitcoin bulls remain confident, as shown by BTC derivatives metrics.

Although the current Bitcoin price trend appears bearish, some analysts believe it still has a good chance to revisit prices above $70,000.

Source: Cryptotoad

Trader and analyst Cryptotoad was impressed by how long the $60,500 support level has held. However, he asserts that a higher high, likely a daily close above $67,000, is needed to break the current bearish pattern. While this analysis does not rule out a potential price recovery, it clearly indicates that the trend points to prices below $57,000 in May.

U.S. inflation data puts short-term pressure on Bitcoin price

Investor disappointment on May 14 stemmed partly from the United States Producer Price Index (PPI) data for April, which showed a 0.5% month-over-month increase. The market interpreted the wholesale inflationary pressure as confirmation that the U.S. Federal Reserve (Fed) will keep interest rates higher for longer, which is detrimental to risk-on assets like cryptocurrencies and growth stocks.

Some argue that inflation is inherently positive for Bitcoin’s performance due to its strict monetary policy. However, during initial phases of fear and uncertainty, investors tend to seek cash and short-term bonds. Yields on 2-year U.S. Treasury notes dropped to 4.84% on May 14 from 5.03% on May 1, indicating that traders are paying a higher price for these fixed-income instruments.

It might seem counterintuitive to seek protection from an economic recession in U.S. Treasurys, but these assets are considered the safest as they are directly backed by the government, unlike money market funds managed by financial institutions. Therefore, while higher-than-anticipated inflation data should have triggered negative sentiment for Bitcoin, this was not reflected in derivatives data.

Bitcoin derivatives show resilience despite lackluster BTC price action

To analyze if professional traders have become more pessimistic about Bitcoin following its drop to $61,000, one should examine BTC monthly futures contracts. In neutral markets, these contracts typically trade at a 5% to 10% premium relative to BTC spot markets to account for the longer settlement period.

Bitcoin 2-month futures annualized premium. Source: Laevitas.ch

Data indicates that the annualized BTC futures premium was largely unaffected by the worsening macroeconomic conditions and Bitcoin’s repeated failure to sustain prices above $63,500 over the past week. The current 8% premium stands right in the middle of the neutral market, leaving a decent margin for negative surprises.

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One should proceed by examining the Bitcoin options market to determine if the demand for hedges increased after the most recent price correction. Typically, if market makers and whales expect a Bitcoin price drop, the BTC options skew metric will exceed 7%, whereas periods of enthusiasm often show a skew below -7%.

Bitcoin 1-month options 25% delta skew. Source: Laevitas.ch

The BTC options 25% delta skew has remained in a neutral range since May 8, meaning market participants have priced call (buy) and put (sell) instruments similarly. According to this metric, the weakness in Bitcoin’s price did not impact how these professional traders assess risks for downside swings.

Bitcoin bears got what they wanted by displaying strength, as the last daily close above $65,000 happened three weeks ago, on April 23. However, bulls did not seem to be impacted by the lack of momentum, which appears mostly driven by investors’ temporary shift toward cash positions. If the inflationary issue in the U.S. persists, market participants may be forced to look for alternatives, so Bitcoin’s path to $70,000 for 2024 remains well in play.