Hello everyone and happy new year! Bitcoin and the crypto market have been exhibiting volatility compression for the last 2 months (a general lack of movement as price consolidates) while the open interest and leverage in the market has been consistently rising. With the rather sobering announcement of the FED today to slowly reduce the balance sheet and work towards tightening and increasing interest rates, BTC broke down. So let’s get into the thick of it.
I’ve been speaking with a lot of crypto hedge funds who have been unloading leverage and selling into highs without relief since October, and since then I mapped a distribution model – as exhibited above.
As we test the pivotal 42k area once again, it becomes more likely for it to snap – especially with the market’s elevated leverage conditions. For a while, it has been clear that a test into the mid to high $30,000 range is not out of the question. This could be an area of massive opportunity, especially for the algorithm.
I’m looking forward to volatility increasing as the algorithm generally benefits in higher volatility scenarios, as it reduces much of the downside, and the aggressive bounces are quickly captured. Here most of the downside will be protected against, and ideally this volatility sets us up for a large upside run. Given the $30,000 region can hold, all is well – and I would expect Bitcoin to make a new ATH sometime in 2022. The thing that could change this scenario is the traditional market climate (SPX, Dow Jones) coming under pressure from the FED and a tightening interest rate environment. To learn more about the interest rate environment, the FED, and its affect on BTC and traditional markets, refer to my article here:
The main question is how quickly will the FED taper and raise interest rates? It can and will affect BTC, as it has heavy correlative ties to both traditional markets, the money supply, and liquidity crises.
The LF algo should be able to pristinely navigate this environment, and if money tightening sends us into a multi-year bear market as some of my big BTC hedge fund friends are thinking, we’ll be able to vastly outperform Bitcoin as it downtrends. For now though, lets hope for a bull run to the fated six-digit number!
Happy New Year!
Great info Alex! Very interesting!
That SPX/BTC chart looks like a decent pairs trade, correlation isn’t super high but the divergence and convergence is pretty consistent.