In the short term, the bitcoin derivatives landscape has a significant impact on the bitcoin price. We have yet to see indications of a bitcoin macrobottom.
While it is evident that the bitcoin market’s link to equities markets is the major driver today, we believe that a real decoupling will occur someday, and the seeds of such decoupling may be sowed in the derivatives market.
To begin, a significant development in the futures market over the last two years has been the “dollarization” of collateral type, which has eliminated most of the negative convexity that comes with a majority of collateral being bitcoin itself.
While a significant liquidation event in the bitcoin market is less likely than March 2020 based solely on the market’s collateral structure and contract positioning (seen below), it is evident that global stock and credit markets are in free decline. With this in mind, and the fact that spot markets have been subjected to huge selling pressure in recent weeks, it would be prudent to keep a careful check on the derivatives market in the coming weeks.
The Federal Reserve
The Federal Reserve is on a quest to reverse engineer the famed wealth effect, with the hope that decreasing asset values will decrease consumer confidence and spending, slowing the world’s unparalleled inflation.
If global markets reach a tipping point, bitcoin will suffer significant pressure as well. What is unknown is how many bitcoin investors/speculators are still in the market and if the selling will occur through spot markets or, more commonly, through shorting via bitcoin derivatives.
In any case, a swarm of bottom shorts will undoubtedly descend, aiming to push bitcoin into the ground (this will be able to be seen via a deeply negative perpetual futures funding rate).
This may eventually lead to a significant comeback in bitcoin’s price, as well as a decoupling/outperformance of other risk assets that have been so closely associated with bitcoin in recent months.