Dollar Strengthens and Bitcoin Price May Suffer – Bitcoin Magazine
Below is an excerpt from a recent issue of Bitcoin Magazine Pro, Bitcoin Magazine premium market’s newsletter. To be among the first to receive this insight and other market analysis on the bitcoin chain straight to your inbox, Subscribe now.
This article will cover legacy market dynamics and evaluate the current state of the “liquidity tide.” Bitcoin Magazine Pro readers are familiar with bitcoin and stock markets trading in tandem; we cover the relationship closely.
We also pay close attention to volatility dynamics across asset classes, as the levels of historical and implied volatility in an asset class are very useful in evaluating relative risk.
Before we dive in, let’s look at our current thesis on the state of global risk markets:
A major slowdown is in the midst of the global economy, as short-term energy policies have worked to keep inflationary pressures high. Although equities and risks have largely felt relief since mid-June, we were and remain of the view that this is a bear market rally with further pain across risks.
Global markets opened to risk at the open of futures trading on Sunday night, and sold off further into the morning as volatility jumped and the dollar (as seen by the DXY) neared another multi-decade high.
The dollar currency index is approaching multi-decade highs
Below is the one-month forward implied volatility for bitcoin, which can be thought of similar to the VIX. While stocks are currently trading with an expected volatility of 24% for the next month (as expressed by the VIX at 24), the bitcoin options market implies 71% volatility for 1-month contracts.
The implied volatility of bitcoin is determined by options contracts
Thus, bitcoin’s underperformance relative to stocks throughout the bear market rally and subsequent decline from the local high is worrisome for bulls, and generally speaks to demand for the asset at current market prices.
We are only objective. Bitcoin has acted as beta for stocks to the upside and downside throughout 2022, but has only just risen with the same fervor and upside volatility through this summer’s rally as stocks melted upward.
With this in mind, the sub-result speaks of a lack of relative performance against global risk markets.
As rising interest rates and a strong dollar put increasing pressure on global equities, one should ask themselves what are the likely outcomes of further risk positioning in equities, and what is the likely response for the less liquid bitcoin market.
As equity markets begin to tip over, and volatility in the old system increases through this deleveraging, we are increasingly confident in our belief that further pain is the likely path before long in the bitcoin market, and opportunistic investors should in turn be ready with a cash grant.
S&P 500-denominated Bitcoin nears 2022 lows:
Bitcoin-denominated in S&P 500 stocks approaching 2022 lows
Given the relative historical correlation between the two asset classes, the historical and implied volatility of the bitcoin market, and the likely path forward for the global economy, today’s price action reiterates our short/intermediate-term market outlook that the bottom for bitcoin is not. still inside.
In the short/medium term, a cash position is probably the asymmetric bet (in bitcoin terms).
In the long term, bitcoin remains completely mispriced as a neutral, hard financial asset purpose built for the digital age.
