On Oct. 2, the price of Bitcoin (BTC) experienced a 5.5% intraday increase to $28,600, but the biggest cryptocurrency by market capitalization lost momentum as the much-awaited launch of Ether (ETH) futures exchange-traded funds (ETFs) did not generate considerable trading volumes.
Even though the recent rally to the upper end of the current price range was probably encouraging to investors, recent comments from United States Federal Reserve representatives reiterated worries about an impending economic downturn.
Bitcoin showed short-term strength by preserving support at $27,200 on Oct. 3 and then surged above $27,500 on Oct. 5. In spite of this, three major trading metrics point to a lacklustre level of support. These metrics involve spot market volumes, derivatives and confidence in the endorsement of a spot Bitcoin ETF.
Macroeconomic forces exert downward pressure on Bitcoin price
On Oct. 2, U.S. Federal Reserve Vice Chair for Supervision Michael Barr declared in New York that the current monetary policy has yet to be fully realized, and that he expects a decrease in economic activity due to higher interest rates. The CME FedWatch tool reveals the market is evenly split on the likelihood of a further interest rate rise in 2023.
Data from the U.S. Treasury Department indicates that on Oct. 3, the real yield on 10-year Treasurys, a figure adjusted for inflation, hit its highest level in 15 years at 2.47%. This is likely a factor in the U.S. Dollar Index (DXY) reaching its highest point in ten months.
In addition, Reuters reported that the U.S. has become a more attractive investment destination due to its “resilient economy” and superior growth potential compared to China and Europe.
Bitcoin trading metrics reveal reduced activity for leverage longs
Historically, Bitcoin monthly futures have been trading at a slight premium to spot markets, which is known as contango. This indicates that sellers are asking for more money to delay settlement, and typically the BTC futures premium should be 5%–10% annually.
Currently, the BTC futures premium is below the 5% neutral threshold, which implies a lack of demand for leveraged long positions.
Moreover, spot trading activity on traditional exchanges has also decreased to levels not seen since late 2020, suggesting that institutional investors are pulling out of the crypto markets.
It is worth noting that this decrease in trading volumes could be due to big U.S.-based trading firms, such as Jane Street Group and Jump Trading, withdrawing from the cryptocurrency markets in the lead up to May 2023. According to Bloomberg, this is primarily because of “heightened regulatory scrutiny” which has made the market less attractive to institutional investors.
Investors’ expectation for a spot BTC ETF drops
The surge of Bitcoin’s 68% gains in 2023 was partly due to the expectation of a spot Bitcoin ETF being approved by the U.S. Securities and Exchange Commission. However, the launch of Ether futures-based ETFs on Oct. 2 did not receive much attention.
Moreover, the Grayscale Bitcoin Trust is still trading at a 19% discount compared with its Bitcoin holdings, despite a favorable court ruling for its conversion into a spot Bitcoin ETF. This suggests that investors are not so confident about the approval of a spot Bitcoin ETF, since they would be able to redeem their shares at par value after the conversion.
Ultimately, Bitcoin failed to break the $28,500 resistance level, and Federal Reserve representatives cautioned of potential economic pressure. Therefore, it seems unlikely that Bitcoin will surpass this resistance in the near future.
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