On July 24, Bitcoin (BTC) experienced a flash crash, plunging to $29,000 due to significant BTC holders potentially selling off their positions. This sudden drop in price, along with market uncertainty, raised concerns among investors. However, despite the crash, Bitcoin’s three major trading metrics continue to indicate a bullish outlook. This suggests that professional traders have not reduced their leverage longs through the use of margin and derivatives.
According to analytics firm Glassnode, there was a surge in whales’ inflow to exchanges, reaching its highest level in over three years at 41% of the total. This forceful sell-off from whales alarmed investors, especially considering that there haven’t been any significant negative events impacting Bitcoin in the past month. One major concern is the ongoing court cases by the U.S. Securities and Exchange Commission (SEC) against leading exchanges Binance and Coinbase. Although there hasn’t been much advancement in these cases, they are expected to take years to settle.
The crash in Bitcoin’s price may have been related to the U.S. dollar reversion. Despite historical volatility, Bitcoin’s crash became more pronounced following 33 consecutive days of trading within a tight 5.7% daily range. This movement is further highlighted by the S&P 500 gaining 0.4%, crude oil rising by 2.4%, and the MSCI China stock market index surging by 2.2%. Additionally, the value of gold, the world’s largest global reserve asset, experienced a dip of 0.5% on July 24. Moreover, the U.S. dollar strength index (DXY) reversed its previous trend of devaluation against competing fiat currencies, rising from 99.7 to 101.4 between July 18 and July 24.
The DXY index measures the strength of the U.S. dollar against a basket of foreign currencies. If investors believe that the U.S. Federal Reserve will successfully manage a soft landing, it makes sense for them to reduce exposure to gold and Bitcoin while increasing their positions in the stock market. Lower odds of a recession can have a positive impact on corporate earnings.
To determine whether Bitcoin’s price drop to $29,000 has had a significant impact on the market structure, it is essential to analyze margin and derivatives markets. Margin trading allows investors to leverage their positions by borrowing stablecoins and using the proceeds to buy more cryptocurrency. The margin lending of OKX traders based on the stablecoin/BTC ratio rose between July 22 and July 24, indicating that professional traders added leveraged long positions despite the recent price crash.
Additionally, BTC futures contracts typically trade at a 5 to 10% annualized premium, known as contango, in healthy markets. This premium sustained an average of 5.7%, slightly lower than two days prior but still within the neutral range. This data confirms the resilience of margin markets. Furthermore, the 25% delta skew, which reveals arbitrage desks and market makers’ expectations, remained negative. This suggests that traders anticipate a drop in Bitcoin’s price, indicating that professional traders remain unperturbed by the flash crash.
Considering all these factors, Bitcoin bears have not been able to dampen investor optimism. Consequently, there are higher chances of a recovery above $30,000 in the short term. It is worth noting that the appreciation of the U.S. dollar does not impact Bitcoin’s predictable monetary policy, censorship resistance, and autonomous nature as a means of payment.
Looking ahead, there are positive triggers on the horizon for Bitcoin, including the possible approval of a spot Bitcoin ETF and gaining regulatory clarity. Recently, a U.S. bill was introduced to establish a clear process for determining the classification of digital assets as commodities or securities. If this bill becomes law, it would give the Commodity Futures Trading Commission (CFTC) authority over digital commodities.
In conclusion, despite the flash crash experienced by Bitcoin, professional traders have not reduced their leverage longs. This indicates a bullish outlook for the cryptocurrency. The crash may have been related to the U.S. dollar reversion, but the resilience of margin and derivatives markets suggests that market sentiment remains positive. Moreover, there are several factors on the horizon that could further drive Bitcoin’s recovery and price growth.