AI hot; Crypto not! That’s set to change. Bitcoin prices have bounced back even as AI hype hogs the newsfeed.
Crypto was disregarded as a product of inflated bull market fuelled by easy money last year. “Risk-on” assets like Bitcoin (BTC) plunged sharply. Subsequent recovery has been refreshingly consistent suggesting a potential resurgence.
BTC stands 80% higher YTD, outperforming the S&P-500, Nasdaq-100, and Gold.
The collapse of Luna, and FTX, among others resulted in much-needed deleveraging and separated the wheat from the chaff.
Some regulatory guardrails are justifiably necessary for investor protection and responsible industry growth. With a positive resolution of Ripple Labs’ lawsuit against the SEC, a more disciplined regulatory approach appears to prevail.
The improving regulatory landscape, rising institutional adoption, and falling US inflation are likely to drive BTC prices higher this year into the next halving cycle.
This paper posits a long position in Micro BTC futures with an entry at 29,750 combined with a target of 36,000 hedged by a stop at 26,400, yielding a reward-to-risk ratio of 1.85x.
UNPARALLELED BTC OUTPERFORMANCE
YTD, BTC has significantly outperformed even the sizzling Nasdaq-100 index which has rallied thanks to large AI-driven gains. Interestingly, the correlation between them indicate that each had unique driving forces.
Like Gold, BTC rally this year was driven by crisis in US regional banks. The collapse of SVB and Credit Suisse drove higher demand for alternative assets.
More bullish drivers await for BTC. First, clarity in regulatory landscape. Second, rising institutional adoption. Third, BTC Halving next year. Finally, falling inflation.
REGULATORY CLARITY
A major ruling in the lawsuit between the SEC and Ripple Labs has lent much needed clarity. The ruling highlighted that XRP’s programmatic and exchange sales did not constitute investment contracts. Though, sales to institutional buyers did constitute a contract.
Though the lawsuit is far from complete, the ruling did indicate that cryptocurrencies are not securities by default. This highlighted that new regulations are warranted and the heavy-handed SEC enforcement in recent months may need to be tempered.
Regulation of digital assets is also progressing well elsewhere. The EU’s MiCA regulation is already in effect. Several other countries are developing regulatory frameworks.
Although this ruling does not have a direct impact on Bitcoin, which was already considered by the SEC and CFTC as a commodity, it does provide much-needed clarity to the larger crypto industry which Bitcoin will benefit from.
RISING INSTITUTIONAL ADOPTION
New and growing institutional entrants in the space have spurred hopes of greater adoption.
A spot Bitcoin ETF has been in the works for the last two years. Grayscale’s initial application was rejected by the SEC citing that the underlying asset lacked adequate security measures for investors.
Since then, new spot BTC ETF applications have popped up, most notably from Blackrock and Fidelity.
Blackrock is the world’s largest asset manager and their entry in the space has revived hopes. Though these initial applications were rejected, they have filed amendments that include a surveillance sharing agreement with Coinbase which is currently under review.
The launch of EDX markets, a crypto exchange created by US financial majors Charles Schwab, Citadel and Fidelity offers investors a much needed trusted and reliable digital asset exchange. This addresses one of the major concerns from last year - Operational and Liquidity risks.
BTC HALVING
Halving is the periodic reduction in block rewards for mining BTC. Every ~4 years, the rewards for mining BTC are halved effectively reducing the available and future supply. This has previously led to a rally in BTC prices.
Currently, BTC trades 2.5x its price at its last halving. At its peak in November 2021, price was 7x the price at last halving.
The next halving is expected around April 2024, coinciding with the expected start of Fed rate cuts. Price gains witnessed during previous halving’s are unlikely as BTC’s market capitalisation grows.
FALLING INFLATION
Finally, falling US inflation foretells the end of the Fed’s rate hiking cycle. CME’s FedWatch tool forecasts one last rate hike this month with rate cuts expected at the end of January 2024.
Loose monetary policy will act like a tailwind for bitcoin prices.
BULLISH POSITIONING ON CME BTC DERIVATIVES
OI in CME Bitcoin futures has increased sharply over the past month as have the total traders
More of this OI is also positioned long. Asset managers have increased their net long positioning by 40% over the past month highlighting bullish sentiment.
Interestingly, leveraged funds have increased their net short positioning in the same period indicating bearish sentiment.
Contango in BTC futures term structure has steepened increasing the likelihood of higher prices in future.
TRADE SET UP
CME’s cryptocurrency suite offers robust index methodology, and regulated exposure to digital assets. CME cryptocurrency futures are also cash settled, removing the hassle of managing private keys or dealing with unregulated exchanges.
Full-size BTC contracts offer exposure to 5 BTC while micro futures allow for more granular exposure with contract size of 0.1 BTC.
Micro BTC contracts have a margin requirement of just USD 760 which translates to built-in leverage of 4x at current prices.
• Entry: 29,750
• Target: 36,000
• Stop Loss: 26,400
• Profit at Target: USD 625
• Loss at Stop: USD 335
• Reward to Risk: 1.85x
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 www.tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Crypto was disregarded as a product of inflated bull market fuelled by easy money last year. “Risk-on” assets like Bitcoin (BTC) plunged sharply. Subsequent recovery has been refreshingly consistent suggesting a potential resurgence.
BTC stands 80% higher YTD, outperforming the S&P-500, Nasdaq-100, and Gold.
The collapse of Luna, and FTX, among others resulted in much-needed deleveraging and separated the wheat from the chaff.
Some regulatory guardrails are justifiably necessary for investor protection and responsible industry growth. With a positive resolution of Ripple Labs’ lawsuit against the SEC, a more disciplined regulatory approach appears to prevail.
The improving regulatory landscape, rising institutional adoption, and falling US inflation are likely to drive BTC prices higher this year into the next halving cycle.
This paper posits a long position in Micro BTC futures with an entry at 29,750 combined with a target of 36,000 hedged by a stop at 26,400, yielding a reward-to-risk ratio of 1.85x.
UNPARALLELED BTC OUTPERFORMANCE
YTD, BTC has significantly outperformed even the sizzling Nasdaq-100 index which has rallied thanks to large AI-driven gains. Interestingly, the correlation between them indicate that each had unique driving forces.
Like Gold, BTC rally this year was driven by crisis in US regional banks. The collapse of SVB and Credit Suisse drove higher demand for alternative assets.
More bullish drivers await for BTC. First, clarity in regulatory landscape. Second, rising institutional adoption. Third, BTC Halving next year. Finally, falling inflation.
REGULATORY CLARITY
A major ruling in the lawsuit between the SEC and Ripple Labs has lent much needed clarity. The ruling highlighted that XRP’s programmatic and exchange sales did not constitute investment contracts. Though, sales to institutional buyers did constitute a contract.
Though the lawsuit is far from complete, the ruling did indicate that cryptocurrencies are not securities by default. This highlighted that new regulations are warranted and the heavy-handed SEC enforcement in recent months may need to be tempered.
Regulation of digital assets is also progressing well elsewhere. The EU’s MiCA regulation is already in effect. Several other countries are developing regulatory frameworks.
Although this ruling does not have a direct impact on Bitcoin, which was already considered by the SEC and CFTC as a commodity, it does provide much-needed clarity to the larger crypto industry which Bitcoin will benefit from.
RISING INSTITUTIONAL ADOPTION
New and growing institutional entrants in the space have spurred hopes of greater adoption.
A spot Bitcoin ETF has been in the works for the last two years. Grayscale’s initial application was rejected by the SEC citing that the underlying asset lacked adequate security measures for investors.
Since then, new spot BTC ETF applications have popped up, most notably from Blackrock and Fidelity.
Blackrock is the world’s largest asset manager and their entry in the space has revived hopes. Though these initial applications were rejected, they have filed amendments that include a surveillance sharing agreement with Coinbase which is currently under review.
The launch of EDX markets, a crypto exchange created by US financial majors Charles Schwab, Citadel and Fidelity offers investors a much needed trusted and reliable digital asset exchange. This addresses one of the major concerns from last year - Operational and Liquidity risks.
BTC HALVING
Halving is the periodic reduction in block rewards for mining BTC. Every ~4 years, the rewards for mining BTC are halved effectively reducing the available and future supply. This has previously led to a rally in BTC prices.
Currently, BTC trades 2.5x its price at its last halving. At its peak in November 2021, price was 7x the price at last halving.
The next halving is expected around April 2024, coinciding with the expected start of Fed rate cuts. Price gains witnessed during previous halving’s are unlikely as BTC’s market capitalisation grows.
FALLING INFLATION
Finally, falling US inflation foretells the end of the Fed’s rate hiking cycle. CME’s FedWatch tool forecasts one last rate hike this month with rate cuts expected at the end of January 2024.
Loose monetary policy will act like a tailwind for bitcoin prices.
BULLISH POSITIONING ON CME BTC DERIVATIVES
OI in CME Bitcoin futures has increased sharply over the past month as have the total traders
More of this OI is also positioned long. Asset managers have increased their net long positioning by 40% over the past month highlighting bullish sentiment.
Interestingly, leveraged funds have increased their net short positioning in the same period indicating bearish sentiment.
Contango in BTC futures term structure has steepened increasing the likelihood of higher prices in future.
TRADE SET UP
CME’s cryptocurrency suite offers robust index methodology, and regulated exposure to digital assets. CME cryptocurrency futures are also cash settled, removing the hassle of managing private keys or dealing with unregulated exchanges.
Full-size BTC contracts offer exposure to 5 BTC while micro futures allow for more granular exposure with contract size of 0.1 BTC.
Micro BTC contracts have a margin requirement of just USD 760 which translates to built-in leverage of 4x at current prices.
• Entry: 29,750
• Target: 36,000
• Stop Loss: 26,400
• Profit at Target: USD 625
• Loss at Stop: USD 335
• Reward to Risk: 1.85x
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 www.tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
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