The Bitcoin (BTC) price has successfully defended the $28,000 support lately, but has yet to prove the strength needed to reclaim the $29,200 level from earlier in the month. While some analysts attribute the recent downtrend to the expectation of an interest rate increase by the U.S. Federal Reserve (Fed), the market is pricing 92% odds of a modest 25 basis point increase to its highest level since September 2007. Market observers have noted that the comments from Fed chairman Jerome Powell are more likely to bring surprise elements, either pointing to further measures to slow down the economy or signaling that the terminal interest rate could be closer to 5%.
On the one hand, evidence suggests that the employment market is overheating, with the U.S. government reporting 1.6 job openings for every unemployed worker in March, and private payrolls increasing by 296,000 jobs in April according to the ADP National Employment report. This could prompt the central bank to raise interest rates to curb inflation.
On the other hand, raising interest rates could have negative consequences for families and small businesses, as financing and mortgages become more expensive, and investing in fixed income become more attractive. This undesired effect could further shake the core of the financial system, as shown by the recent bank failure of First Republic Bank.
If Bitcoin prices breach $30,000, it could signal a shift in investors’ perception from viewing it as a risk-asset to a scarce digital asset that directly benefits from a weaker traditional banking system. However, to determine whether Bitcoin is more resilient than traditional financial instruments, it is essential to analyze if excessive leverage has been used by buyers and whether professional traders are pricing higher odds of a market downturn using BTC derivatives.
Interestingly, Bitcoin traders appeared extra cautious in recent weeks, with no signs of demand for leveraged longs even as the BTC price approached $30,000. The Bitcoin futures premium has stagnated near 2% since late April, suggesting that buyers are unwilling to use leverage, which is considered healthy for the market. By avoiding futures contract exposure, it greatly reduces the risk of large liquidations during negative Bitcoin price movements.
Moreover, the Bitcoin options market also indicates balanced demand between call and put options in the past month. This comes as a surprise given the 10% Bitcoin price rally between late April, when it last tested the $30,000 resistance.
In conclusion, Bitcoin options and futures markets suggest that professional traders are not expecting the BTC price to break above $30,000 anytime soon. On the other hand, these whales are pricing in similar odds of surprise positive and negative moves. Regardless of the Fed’s decision on interest rates, Bitcoin may ultimately benefit, as Jerome Powell will force the U.S. Treasury to inject more money into the economy to contain the banking crisis, which will be advantageous for a scarce asset such as Bitcoin.