After Bitcoin’s Stunning Rally. What Next?

Bitcoin is surging through expectations defying rally. Bitcoin (“BTC”) stands 22% higher over the last seven days. At its highest on 28 Feb 2024, BTC at USD 64k was 7% shy of its all-time-high.

Recent bitcoin (“BTC”) performance harkens back to the euphoric bull runs. Market metrics signal more steam in store.

This note discusses BTC’s recent rally and the road ahead. Anticipating short-term consolidation, this paper posits a short position in BTC/ETH ratio.


BITCOIN RALLY HAS MORE IN STORE

BTC is soaring fuelled by a range of tailwinds including strong demand from newly listed spot BTC ETFs, expected BTC halving, and a broader crypto market rally.

1. On-chain metrics do not signal significant profit taking (yet). Long-term holders have shown resilience despite significant gains in their holdings. Unrealized gains can be inferred by the market-value-to-realised-value (“MVRV”) indicator. MVRV assesses the market capitalization of BTC relative to its realized capitalization. It is determined by the price at which coins were last traded.

Current MVRV of 2.5x indicates that the current BTC prices are >2.5x the price at which coins last moved. Despite this, BTC supply that has remained unmoved in the past one year has remained surprisingly resilient. Supply not moved in more than a year is down 3.75% over the past three months while prices have rallied 53% and MVRV has remained >2x.

During previous cycles, particularly, when price peaked, MVRV was closer to three times, profit taking rates were high causing physical BTC to change hands rapidly. Current conditions do not match previous drawdowns suggesting potential for consolidation limiting further gains. Past performance does not necessarily imply future trends.

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Current exchange inflows are near record highs. A substantial portion of these is from short-term holders rather than long-term holders.

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Source: Glassnode


2. Continued spot buying as well as strong ETF demand. ETF demand shows no signs of slowing. Since putting our last paper on 26th Feb, an additional USD 2.3B of inflows have surged into spot ETFs. The pace of daily net flows to ETFs reached its highest level to date on 29th Feb.

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Demand remains so solid that IBIT became the fastest ETF to reach USD 10 billion in AUM, just 51 days after launch. Fidelity’s FBTC is not far behind at USD 6.2 billion in AUM. GBTC outflows have continued but the pace of inflows has not reached those seen at the beginning.

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In addition to fund flows, traded volumes have also remained elevated. BTC ETF volumes reached USD 11 billion on 28th Feb when prices soared above USD 60k for the first time. Volume on ETFs was particularly high when price rallied to its peak of USD 64k.

3. Funding rates and options smile. Funding rates on BTC perpetual futures signal elevated levels of speculative bullish demand. Funding rates are at levels observed during past bull runs.

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Options markets are also pricing in further upside after last week. BTC options volatility curve of BTCH24 (March 2024) has shown a far higher forward skew compared to prior week. This is indicative of higher price for calls (bullishness) compared to puts (bearishness).

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Source: QuikStrike


Call/Put skew over the past month shows that skew for calls have started to expand once more following sharp rally above USD 60k on 28th Feb.

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Source: QuikStrike



BITCOIN NOW FACES RESISTANCE
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Source: Coinglass


BTC market suffered large liquidations following sharp rally on 28th Feb. Liquidations were spread across both longs and shorts, but overall short liquidations were higher.

Across two more periods when price failed to surpass USD 63k definitively, long positions were liquidated once more. Still, since then liquidations have been much smaller than the peak.

Price remains rangebound after crossing USD 60k. It faced resistance crossing past USD 65k and maintained support above USD 60k.


BTC-ETH SPREAD LIKELY TO RALLY

BTC rallies typically precede ETH rallies as described before. Since that paper was published, the spread is merely 4% lower. The spread remains elevated relative to historical levels.

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ETH has its unique tailwinds pushing it higher independent of BTC and the broader crypto market. Higher ETH burn due to greater on-chain activity is reducing ETH supply.

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Moreover, decisions on spot ETH ETFs are expected by May 2024. While the final decision remains uncertain, the approaching deadline is likely to fuel bullish sentiments.


HYPOTHETICAL TRADE SETUP

BTC price is sharply higher and close to its previous all-time-high. Tailwinds for BTC remain intact. It faces near-term price consolidation following the sharp rally.

BTC price consolidation will favour ETH in BTC/ETH spread. ETH outperformed BTC during periods of consolidation in the past.

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A spread position comprising of long Micro ETH futures and short Micro BTC futures allows investors to gain exposure to this trend with a 50% margin offset.

Micro ETH futures offer exposure to 0.1ETH and Micro BTC futures provide exposure to 0.1BTC. Thus, eighteen contracts of METH2024 are required to match notional for one contract of MBTH2024.

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The below hypothetical trade setup offers a reward-to-risk ratio of 1.8x:

• Entry: 18.35
• Target: 16.87
• Stop Loss: 19.50
• Profit at Target: USD 5,255 (+8.1%)
• Loss at Stop: USD 4,025 (-6.2%)
• Reward to Risk: 1.3x


MARKET DATA

CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/.


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