The following is a free, full excerpt from a recent issue of Bitcoin Magazine Pro, The Bitcoin Magazine Premium Markets Newsletter. To be among the first to get these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.
In today’s Bitcoin Magazine Pro, we will be covering the historically significant 200-week moving average, as well as weekend price action and derivatives market action.
Bitcoin is currently below its 200-week moving average, which has only happened four times in Bitcoin’s history and marks significant cyclical bottoms, but none have occurred in the unique economic situation we find ourselves in today. While today and this past weekend will likely look like prime accumulation opportunities five years from now, it’s hard to conclude that the worst is over and things are only picking up from here, with potentially more cryptocurrency-related contagion and macro headwinds. Notwithstanding the ugly macro backdrop (which the market has no doubt been pricing in over the past six months), simply looking at the 200-week moving average to frame Bitcoin accumulation has served past market participants very well.
derivatives market shenanigans
Our issues over the past week have focused solely on cryptocurrency contagion as industry-wide panic erupted over whether various counterparties were solvent and whether funds on various platforms were safe for users/depositors.
Read last week’s editions here:
While much of the sell-off was driven by forced selling due to collateralized lending on DeFi protocols (or fear of it), the derivatives market on centralized exchanges also deserves a close look as it still plays an important role in the movement market short- /medium term.
As the price of bitcoin fell below $20,000 and ether to $1,000, perpetual swap futures open interest exploded and funding rates went deep into negative territory.
In layman’s terms, as markets fell, derivatives traders drove the price lower with increasing leveraged capital, with negative funding rates showing that perpetual futures contracts led the way down.
As the price hit the mid-$17,000s and found supply, late shorts were sidelined and became forced buyers as the market quickly reversed, flying back to $20,000 before the weekend was over. There is no such thing as a free market lunch, and the bitcoin market has a way of punishing all undisciplined/overly leveraged market participants through its notorious volatility. This derivatives market data leads us to conclude that the rally back to $20,000 was more of a function of covering short sales.
It should be noted that one of the telltale signs of a bitcoin bottom is a sharply shortened market, and comparing derivatives market data to previous years shows that this phase could be very soon.
A heavily shorted bitcoin derivatives market is a market primed to fly higher, and while we saw a strong reversal above $20,000 over the weekend due to a squeeze in short positions, the worst could be yet to come.
Sustained periods of negative funding for perpetual futures and backwardation (futures price below spot price) are two of the biggest telltale signs that a market is primed for a reversal to the upside.
While short positioning has been more frequent and severe over the past few days than it has been over the past six months, during a true market cycle bottom (when analyzing past cycle bottoms), you should.