DXY bounces at major support, reducing Bitcoin’s chance of breaking the $17.2K resistance

by · December 2, 2022

On December 2, the US dollar index (DXY), an index that measures the dollar’s strength against a basket of top foreign currencies, hit 104.40, the lowest level seen in 5 months.

To summarize, the US dollar’s weight against the basket of top foreign currencies grew 19.6% in 2022 through the end of September as investors looked for protection against the impact of a hawkish Federal Reserve and, more recently, rising energy costs and the effect of high inflation.

The US dollar’s decline may have been a temporary correction to neutralize its “overbought” condition, as the peak of 114.60 was the highest level in 20 years. Nevertheless, its inverse correlation with Bitcoin (BTC) remains strong, as pointed out by analyst Thecryer on Twitter:

Note how the intraday DXY pullback to 105.50 from the 104.40 low occurred as Bitcoin faced a $230 flash crash to $16,790. Such moves reinforce how cryptocurrencies’ performance remains dependent on traditional markets.

Bitcoin enthusiast Aldo the Apache noted that the DXY “bullish divergence at support” occurred as the S&P 500 stock market index struggled with a key resistance level.

According to the analyst, the net effect for Bitcoin is negative if the expected trajectory confirms with the US dollar increasing in strength against major fiat currencies, and the stock market turns another leg down.

On-chain calculations also paint a potentially bearish picture as Bitcoin miners feared entering a new wave of capitulation, has increased the sale of BTC reserves. For example, the record hash rate and increased energy costs have drastically cut miners’ profitability.

Glassnode’s miner outflow multiple, which measures BTC outflows from miner wallets relative to their one-year moving average, is now at a six-month high.

Let’s look at derivatives calculations to better understand how professional traders are positioned in today’s market conditions.

Bitcoin margin longs see a drastic reduction

Margin markets provide insight into how professional traders are positioned because it allows investors to borrow cryptocurrency to leverage their positions.

For example, one can increase exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only short the cryptocurrency when they are betting that the price will go down. Unlike futures contracts, the balance between margin longs and shorts is not always matched.

OKX stablecoin/BTC margin lending ratio. Source: OKX

The chart above shows that OKX traders’ margin lending ratios fell sharply from November 27 to November 30, signaling that professional traders reduced their leveraged loans during the decline toward $16,000.

More importantly, the subsequent $1,250 gain that took Bitcoin to $17,250 on November 30 was not enough to instill confidence in Bitcoin buyers using stablecoin loans. Still, currently at 23, the metric favors stablecoin borrowing by a wide margin – indicating that shorts are not confident in building bearish leveraged positions.

Related: Crypto miners in Russia are taking advantage of the bear market by hoarding ASIC devices

Options traders remain risk averse

Traders should analyze the options markets to understand whether Bitcoin will succeed in breaking the $17,250 resistance. 25% delta bias is a clear sign when arbitrage desks and market makers are overcharging for upside or downside protection.

The indicator compares similar call (buy) and put (sell) options and will turn positive when fear is prevalent because the protective put option premium is higher than risky call options.

In a nutshell, the skew will move above 10% if traders fear a Bitcoin price crash. On the other hand, generalized voltage reflects a negative bias of 10%.

Bitcoin 60 Day Options 25% Delta Bias: Source: Laevitas

As shown above, the 25% delta bias fell between November 21 and November 30, indicating that options traders reduced their bets on unexpected price dumps. But the trend reversed on December 1 after the $17,250 resistance proved stronger than expected.

Currently at 18%, the delta bias signals that investors remain fearful, reflecting a lack of interest from whales and market makers to offer downside protection.

Consequently, pro-traders are not confident that Bitcoin will regain $18,000 anytime soon, which can be explained by the high correlation with traditional markets.

Until the DXY index sets a more precise direction and the S&P 500 shows strength at 4000, the trend favors Bitcoin bears.