- With bitcoin appearing to have stabilized, some investors will be wondering if now isn’t the time to wade back into cryptocurrency waters, especially if more upside is ahead.
- Nevertheless, the options market, which is a good indicator of where traders expect bitcoin and other cryptocurrencies to head in the near-term future, should provide some comfort for bulls.
Tarot cards, tea leaves and goat entrails – there’s no shortage of methodologies (of varying efficacy) to attempt to explain or (gasp) predict the future price action for bitcoin.
But investors searching for clues as to where the bellwether cryptocurrency may be headed next might want to set down their goat for minute as movements in the options market appear to suggest that the bearish turn for bitcoin may soon be in the rearview mirror.
After dipping below US$40,000 for the first time since last September and off almost 40% from its all-time-high recorded in November, bitcoin appears to have maintained composure above that important level of support.
With bitcoin appearing to have stabilized, some investors will be wondering if now isn’t the time to wade back into cryptocurrency waters, especially if more upside is ahead.
Difference in implied volatility of bullish and bearish bets has recently dropped from double-digits to almost zero, revealing a decrease in demand for bearish put options (the right to sell at a specific price) and an increase for bullish call options (the right to buy at a specific price).
Given that more investors are “hodling” bitcoin for the long-term, the support at US$40,000 lends heft to the theory that the cryptocurrency has bottomed out, providing an opportunity for new entrants to go long on the famously volatile asset.
There are however short to medium term limits on the upside of bitcoin, especially since the U.S. Federal Reserve has taken a hawkish turn, with the prospect of interest rate hikes potentially curbing appetite for risk assets.
Institutional capital also continues to flow into the cryptocurrency space and the circumstances appear to be different from the 2017-2018 period, which ushered in a two-year “Crypto Winter.”
Because bitcoin and cryptocurrencies have recently demonstrated strong correlations with high-growth tech stocks, some investors are waiting to see equities take a turn for the better before plunging into digital assets.
But correlations between cryptocurrencies and other assets have never been static, and the limited data and relative immaturity of the nascent asset class has meant that cryptocurrencies have not shown consistently unbroken correlations, making it even more complex for investors to figure out what happens next.
Nevertheless, the options market, which is a good indicator of where traders expect bitcoin and other cryptocurrencies to head in the near-term future, should provide some comfort for bulls.
