Bitcoin Breakout Coming? Crypto traders may want this TradFi link

Bitcoin, S&P 500 and CPI Talking Points:

• Market perspective: Bitcoin Bull above 17,750 and Bear below 16,500
• Debate continues around what role Bitcoin and the broader digital currency space play in the larger financial system
• Investors’ speculative appetite still has a significant impact on the benchmark crypto, but is the feedback loop strong enough to risk an upcoming peak event to push BTC out of its range?

The cryptocurrency market has been pretty quiet lately. In areas like Litecoin or Dogecoin – and generally further away from the major players – Bitcoin has an incredibly restrictive range in the center of the market. Much of the last phase of volatility we last experienced in this market was in response to the collapse of the FTX. The cryptocurrency broker and hedge fund’s rapid slide toward bankruptcy began on Nov. 2 when a CoinDesk report highlighted that significant holdings from its hedge fund affiliate Alameda Research were concentrated in FTT, a token created by FTX. The real market action began on November 6, however, when the CEO of rival Binance announced that the company would sell all of its FTT (about $580 million), sparking what normal financial market participants described as a “bank run.” On November 8th and 9th, top selling point Binance said it would buy FTX and after due diligence withdrew its offer. Since the seismic shock in the cryptocurrency space, we have gone from extreme activity to extreme inactivity. In fact, over the past 10 trading days (equivalent to two weeks), BTCUSD has seen its historical range fall to 4 percent of the spot, while the ATR (the average true range as a measure of volatility) has fallen to 1.8 percent. These are restrictive measures from this market from July 2020.

Bitcoin Chart with 10-Day Historical Range and ATR (Daily).

A chart has been created Tradingview Platform

For true die-hards of cryptocurrency (Bitcoin, digital assets, and blockchain in general), they should seek permanent reductions in volatility for space. If decentralized finance is to become the plumbing of a system so often discussed in more philosophical channels, stability is a key aspect of such a foundation. Such “utilities” generally experience very little price variation as part of their connection to the overall system. Anything of this type that suffers from high levels of volatility leads to economic problems like the hyperinflation that the world has been experiencing for the past year. However, despite a nearly 75 percent decline from a year ago and significant changes in daily and weekly volatility, speculative interest remains. Without this connection, traditional monetary policy and skepticism from financial players and regulatory pressures could severely constrain the industry. Looking at the statistical relationship between Bitcoin and the speculative favorite S&P 500, the 20-day and 60-day (1 and 3 month) rolling correlations have been strong over the past month. As of late, the 20-day correlation is essentially zero (no apparent correlation) and the 60-day strongly reverses. However, given the risk of such a severe event for the traditional trader this week, the crunch for liquidity everywhere could affect portfolio risk in this space – just like stocks, Treasuries and other assets.

Bitcoin chart overlaid with S&P 500 with 20 and 60 day correlation (Daily)

A chart has been created Tradingview Platform

Although the FTX debacle happened in early November, Bitcoin still managed to rally smartly on the 10th despite the uncertainty of the broker’s situation after the collapse of the Binance deal on the 9th. This may be because traders in the cryptocurrency market once realized that the collapse of a major player is not a systemic threat to the market as a whole. Still, a speculative charge on a slower-than-expected October CPI print that sent the S&P 500 sharply higher was a similar rescue for this asset. On the shorter time frame chart, it’s worth noting that the runs between the two assets align neatly. If the volatility in the tradfi market needs to reach a certain peak to give opinion on the cryptocurrency, we have potential ahead. In Tuesday’s trading session, we have the latest reading from last month’s key dynamite (November CPI) as we anticipate Wednesday’s FOMC rate decision.

Calendar of Key Macro Event Risks for the Next 24 Hours

The calendar was created by John Kicklighter