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Stock Correlation Risks Crashing Bitcoin by 25-35%, Asserts Researcher

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A growing positive correlation between Bitcoin and stocks could spell trouble for the former, according to Vlad Antonov of Santiment, a data analysis service.

In a note published Wednesday, the researcher said that he expects Bitcoin to fall drastically should the stock market maintain its influence over it. He recalled recent cases wherein both Bitcoin and the S&P 500 rallied in sync against some of the most market-shaking events, including the recent successful COVID-19 vaccine trials and the US election.

Bitcoin-S&P 500 correlation. Source: BTCUSD on TradingView.com

Just Bitcoin rallied too faster than its correlated peers, eking out 71.5 percent gains so far into the fourth quarter. The S&P 500, on the other hand, added only 7.32 percent in profits in the same period.

Bitcoin DAA-Price Divergence

Mr. Antonov noted that euphoria for Bitcoin was decent across social media. Buying sentiment in the retail market surged after high-profile firms and individuals either bought the cryptocurrency or started providing its services to their existing clientele (read PayPal).

But one metric left the upside at risk of exhausting. Mr. Antonov said there is “an alarming divergence” between the Bitcoin price and its daily active addresses.

Bitcoin, cryptocurrency, BTCUSD, BTCUSDT

Bitcoin Daily Active Addresses vs. Price Divergence. Source: Santiment

The graph above shows that DAA vs. Price Divergence remains in the bearish territory since October 2020. But ignoring that, the Bitcoin price is marching towards $20,000, its current record high. That is further increasing the divergence and strengthening the market’s bearish bias.

“If stocks will go through a correction in November-January, I anticipate that Bitcoin will have a 25%-35% correction,” Mr. Antonov wrote. “I conclude this from the lack of daily activity on the network and very bearish DAA vs Divergence.”

Underwhelming Social Volume

Mr. Antonov also compared the current social volume in the Bitcoin market compared to its previous rallies/pullbacks. He noted that the cryptocurrency is getting public attention, but it is still not as high as in March, May, and August.

Bitcoin, cryptocurrency, BTCUSD, BTCUSDT

Bitcoin Weighted Social Sentiment vs. Price: Source: Santiment

That, nevertheless, landed Bitcoin in a conflicted zone. The cryptocurrency rose towards $18,500 despite an underwhelming social volume. It also managed to hold onto its crucial support areas during downside corrections. Mr. Antonov said analysts could interpret it as a positive signal on the whole.

“When it comes to a weighted social sentiment, the overall trend bullish,” he added. “However, it significantly dropped compared to the beginning of the bull run that lifted BTC from 11k to 16k. It doesn’t look bullish enough to cause another 50-100% price growth in a short period.”



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Bad call? Bitfinex bears closed a block of Bitcoin shorts before the drop below $32K

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Bitcoin price is still in a rut, trading near $33,000 and trapped in a downtrend that just seems to get worse with the passing of each day. As the price slumps, analysts have consulted with several technical and on-chain metrics to explain the price collapse, but none of these have picked up on the exact reason. 

One area of interest has been the sharp rise in short positions at Bitfinex in the past week. Traders are placing exaggerated importance on these Bitcoin (BTC) margin shorts as if they are predictors of the current market crash. Still, as Cointelegraph previously reported, analysts forget that Bitcoin margin longs are usually much larger.

On June 18, longs outnumbered Bitfinex shorts by at least 22,800 BTC, but 87% of the short positions were closed before June 22. Currently, margin longs are 43,850 BTC higher than the amount shorted.

While those shorts are usually savvy traders, it is unlikely that they knew in advance that Chinese banks would prevent their clients from engaging in activities involving crypto trading or mining.

More importantly, these bearish positions were built while MicroStrategy was buying $500 million in Bitcoin after a successful senior secured note private offer. To make things worse, Michael Saylor’s business intelligence firm announced the intention to raise another $1 billion by selling stocks to buy Bitcoin.

Let’s take a look at how these courageous shorts fared.

Bitfinex margin shorts (blue) vs. Bitcoin price in USD (orange). Source: TradingView

On June 6, shorts increased from 1,380 to 6,700 at an average price of $36,150. Three days later, another 12,180 shorts were added when Bitcoin was trading at $37,050. Lastly, between June 14 and 15, shorts increased 6,000 to a 25,000 peak while Bitcoin averaged $40,100.

By looking at the Bitcoin prices when those short position increases took place, it is reasonable to assume that the 23,500 contract increase (green circles) had an average price of $37,625.

Related: Traders search for bearish signals after Bitcoin futures enter backwardation

Traders closed positions before BTC crashed bel$32,000

These short positions were steadily closed over the past three days when Bitcoin was already trading below $37,000. However, 17,000 short contracts had already been closed by the time the price plunged below $33,500. Therefore, it is implausible that the average price was below $34,500.

No one would complain about gaining 8%, shorting the market to generate a $73 million profit. However, it is essential to note that on June 16, when Bitcoin reached $40,400, these shorts were underwater by $65 million.

This analysis shows how even highly professional traders can go deep underwater. There’s no way to know if this trade would have been profitable had the crackdown on China not aggravated Bitcoin price or if MicroStrategy managed to raise the $1 billion before the price drop.

If anyone still believes in market manipulation, at least there’s comfort in knowing that pro traders can face drastic losses as well. However, unlike us mortals, whales have deep pockets and patience to withhold even the most rigorous thunderstorms.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.