Bitfinex Alpha | BTC Local Lows Look Close but Beware News Agenda

Bitcoin prices dropped below their 120-day range on July 3rd, reaching $53,219, as the market reacted to fears of selling by both the German government and Mt. Gox creditors. However, market data over the weekend suggest that a potential local bottom has been reached.

Firstly, the market has begun to realise that contextually, despite the large nominal value of BTC transferred to exchanges by the German government, as a proportion of all Bitcoin bought and sold since 2023, it is a relatively small number.

Secondly, volatility metrics have recorded a narrowing in the spread between implied volatility and historical volatility, suggesting that the market expects more stability going forward and implies that BTC could range at current levels, or at least experience less severe declines. 

Thirdly, market positioning displays complacency with shorts, as evidenced by the high number of short liquidations, even yesterday (July 7th), as the market rebounded, suggesting a higher number of ‘late shorters’ on lower time frames, and perhaps a lack of clear conviction in either direction.

While we do see long-term Bitcoin holders continuing to realise significant profits on their spot holdings, short-term holder selling might be close to exhaustion. We note that the Spent Output Profit Ratio (SOPR) for short-term holders is at 0.97, indicating that this cohort is now selling at a loss. In the past, when this has happened, prices have rebounded as selling pressure eased.

Further, the funding rate across BTC perps have turned negative for the first time since the May 1st bottom. This might be seen as increased bearish sentiment but it also reinforces the view that BTC might be stabilising or nearing a potential bottom, as the balance of buying and selling pressures evolves. 

Historically, periods of negative funding rates combined with low short-term SOPR values have often marked the bottom of price corrections. Negative funding rates suggest that selling pressure is high or sellers are dominating the market, but it can also indicate that the market is oversold. When this oversold condition aligns with a recovering SOPR, it often signals that the market is finding a floor.

In the macro economy, the Fed minutes shows that officials continue to remain highly cautious about cutting rates, even though  labour market data and easing inflation is supportive of an easing in monetary conditions. Unemployment is now at 4.1 percent, the highest since November 2021, signalling an economy adjusting to long-term growth and hiring trends. 

There has also been a notable slowdown in payroll growth, with 111,000 fewer jobs created in April and May than previously estimated. The median duration of unemployment rose from 8.9 months in May to 9.8 months in June, indicating longer job search periods. The number of job openings per unemployed person held steady at 1.22, and the quit rate remained unchanged at 2.2 percent, suggesting no additional wage pressure from workers quitting.

In addition, the Institute for Supply Management’s Manufacturing Purchasing Managers Index contracted in June, with the index dropping to 48.5, its lowest since February. Sub-indices for production, new orders, and inventories all declined, reflecting reduced demand and sentiment. Employment in manufacturing also fell. Similarly, the non-manufacturing PMI fell to 48.8, its lowest in four years, indicating contraction in the services sector. 

We do not expect rates to fall at the next policy meeting, scheduled for July 30-31, but remain hopeful of a cut in September.

Have a good trading week.

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