Market Update: Bitcoin Booms After Bust

Is Bitcoin's star power waning? That was the question on everyone's mind after the cryptocurrency suffered its worst week since August. But the story took a sharp turn at the beginning of this week.

Bitcoin defied expectations and surged past the $70,000 mark, clawing back lost ground. So, what's the real story? Let's revisit the factors that contributed to the recent price dip and the underlying sentiment in the market.

The initial excitement surrounding Bitcoin ETFs was said to be losing steam. The 10 Bitcoin spot ETFs witnessed their largest weekly outflow since their January launch, signifying a potential shift in investor sentiment. As interest in new spot Bitcoin ETFs cooled last week, Bitcoin's price fell over 10% from its all-time high of almost $73,798 on March 14.

But the token regained lost ground on Monday and crossed the $70k mark, and is up by 5.62% in the past 24 hours.

With Bitcoin clawing back significant losses, the "correction" theory seems to be gaining ground. However, some analysts remain cautious, citing the upcoming halving event and the potential for renewed volatility.

Investment managers divided

Some believe the ETF outflows signal a potential continuation of profit-taking, especially considering the upcoming halving event and the overbought market conditions. Others suggest the declining inflows indicate a stabilization of interest in Bitcoin ETFs, with some investors questioning the rally's sustainability after its initial rapid ascent.

"The ETF outflows raise questions about the notion that the flow of spot Bitcoin ETFs will consistently move in a single direction. Considering the upcoming halving event and the current overbought positioning backdrop, it is likely that this profit-taking will continue," said the investment manager at a large find house in London.

"The inflows have declined in the past week, suggesting a possible stabilisation of interest in Bitcoin ETFs for now. Some people started questioning the rally's strength when it didn't continue its previous rapid ascent from the record high," added the investment manager.

Bitcoin spot ETFs experienced consecutive days of net outflows last week after a prolonged period of net inflows, with a significant amount of money withdrawn from Bitcoin spot ETFs and Grayscale's GBTC ETF on Thursday.

Since their debuts, there has been a total net inflow of $11.32 billion, while the net asset value of Bitcoin spot ETFs currently stands at $53.76 billion.

Underlying jitters

Despite the recent surge, the derivatives market still suggests some underlying jitters. While the demand for downside protection has eased slightly, the short-term sentiment remains somewhat negative, as evidenced by the higher volume of Bitcoin put options expiring on March 29th compared to call options.

The steep decline in spot rates for Bitcoin and Ethereum for tenors with shorter maturities indicates a shift in market sentiment towards the near future.

There may be less need for leveraged long exposure now that funding rates have cooled from their monthly highs, even though they are still positive.

Market instability is evident because Bitcoin and Ethereum volumes vary. Additionally, the 25-Delta Risk Reversal has shifted its bias towards short-dated put options, making it more negative in ETH than BTC.

Spot yields at short-dated tenors have experienced a notable decline, indicating a potential shift in market sentiment in the coming days. A similar fall in yields can be observed in ETH, though not as sharp as in BTC.

Funding for perpetual swaps has cooled down from monthly highs, suggesting a reduced desire for leveraged long exposure, even while the rate is positive.

In contrast to last week, funding in USDC-margined contracts has turned positive, while token-margined contracts remain low. The substantial move towards puts at short-dated tenors in the BTC 25-Delta Risk Reversal shows increased short-term negative sentiment.

The volume of Bitcoin put options expiring on March 29 has exceeded that of call options. According to data from the crypto options exchange Deribit, the put-to-call ratio has increased. This suggests a possible negative trend, reflecting market sentiment towards the underlying asset.

The strike prices for put options on the marketplace range from $50,000 to $45,000. On Friday, the price of Bitcoin was around $64,300.

Halving: concern or catalyst?

The real question is, what impact will the 'halving' event, which is about 25 days away, have on the top crypto token?

Set to occur around 20 April, the halving, when reward for Bitcoin mining will be cut in half. While it will significantly reduce miners' income, it could also lead to increased scarcity and potentially drive up the price in the long run. To address this, their focus will be on upgrading to the most efficient equipment.

The exodus has already started – more than 6,000 Bitcoin mining computers in the US are set to be relocated to a warehouse in Colorado Springs. The outdated machines will be refurbished there and sold to international buyers who want to profit from mining in more affordable locations.

The recent price surge in Bitcoin has breathed new life into Bitcoin mining stocks. Riot Platforms, CleanSpark, and Cipher Mining all experienced significant gains this week, mirroring Bitcoin's upward trajectory. However, the long-term outlook for mining stocks remains tied to the price of Bitcoin. If Bitcoin experiences another correction, mining stocks could follow suit. Additionally, the upcoming halving event could strain miner profitability in the short term, potentially impacting stock prices.

"For the broader market, if the supply cut from halving does not further boost the price, Bitcoin will experience more pain ahead," said the chief investment officer at a large US fund house in Boston.