Bitcoin breakout ahead? Crypto traders might want that TradFi connection

Bitcoin, S&P 500 and CPI Talking Points:

• The market perspective: Bitcoin Bullish above 17,750 and Bearish below 16,500
• The debate continues around what role Bitcoin and the wider digital currency space play in the larger financial system
• Investors’ speculative appetite still represents a significant influence in the benchmark crypto, but is the feedback loop strong enough for peak event risk ahead to break BTC from its reach?

The crypto market has been extremely quiet lately. Although there has been some activity in areas like Litecoin or Dogecoin – and generally further out from the core players – at the center of the market is Bitcoin’s incredibly restrictive range. Much of the last phase of volatility that we experienced last from this market was in response to the FTX collapse. The crypto broker and hedge fund’s rapid progression to bankruptcy began on November 2nd when a report from CoinDesk highlighted that significant holdings of its hedge fund affiliate, Alameda Research, were concentrated in FTT which is a token created by FTX. However, the real market movement began on November 6 when the CEO of rival Binance stated that he would sell the company’s entire FTT (estimated at $580 million) triggering what normal financial market participants would have described as a “bank run”. The peak sale occurred on November 8 and 9 when Binance said it would buy FTX and then withdrew its offer after due diligence. Since the seismic shock to the crypto exchange space, we have oscillated from extreme activity to extreme inactivity. In fact, over the past 10 trading days (equivalent to two weeks), BTCUSD has seen its historical range plunge to 4 percent of spot while its ATR (average true range, as a measure of volatility) fell to 1.8 percent. These are the restrictive measures from this market since July 2020.

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

Diagram Created it Tradingview platform

For the true diehards of the crypto space (Bitcoin, digital assets and blockchain in general), they should want to seek out a permanent reduction in volatility for the space. If decentralized finance is to become the plumber in the system so often discussed in the more philosophical channels, stability is a key aspect of such a foundation. Such “utilities” generally experience very little price fluctuation as part of their connection to the overall system. Anything of this kind that suffers from high volatility leads to economic problems such as the hyperinflation that has been experienced by the world in the past year. Despite the nearly 75 percent decline from just over a year ago and the significant moderation in day-to-day and week-to-week volatility, there remains a speculative interest. Without that connection, the skepticism from traditionalist monetary policy and financial players together with regulatory pressure could dampen the industry dramatically. Looking at the statistical connections between Bitcoin and speculative favorite S&P 500, the 20-day and 60-day (1 and 3 months) rolling correlations have been strong throughout the last month. Lately, however, the 20-day correlation is essentially zero (no discernible correlation) and the 60-day is strongly inverted. But with so much event risk this week for the traditional trader to consider, it’s possible that liquidity squeezes across the board could affect portfolio exposure in this area – just like stocks, Treasuries and other assets.

Chart of Bitcoin Overlaid with S&P 500 with 20 and 60 Day Correlations (Daily)

Diagram Created it Tradingview platform

While the FTX debacle unfolded in early November, it’s worth nothing that despite the uncertainty surrounding the broker’s situation after the Binance deal fell through on the 9th, Bitcoin still managed to rally smartly on the 10th of the month. It may be because traders in the crypto market at the time realized that the collapse of the once key player was not a systemic threat to the market in general. Then again, the speculative charge tied to the slower-than-expected October CPI print that sent the S&P 500 soaring was a similar salvo to this asset. It’s worth noting on a shorter time frame chart, the runs between the two assets appear to line up nicely. If volatility in the tradfi market has to reach a certain peak for feedback to crypto, we have the potential ahead. In Tuesday’s trading session, we have the latest reading from last month’s fundamental dynamite (November CPI), while Wednesday offers up the FOMC interest rate decision.

Calendar of major macro event risks for the next 24 hours

Calendar Created by John Kicklighter