Bitcoin Heads Into Fed Week With Least Downside Protection Since June, Bitfinex Analysts Say

According to Bitfinex analysts, in May and June, wallets holding 100 to 1,000 BTC sold for $5.1 billion.

• Bitcoin has traded near $65,000 for most of July, with CME FedWatch pricing a 33.7% likelihood of a rate hike.
• Bitfinex analysts said the 30-day put skew fell from 6.5 volatility points on July 14 to 2.2 on July 23, giving the market its lowest downside protection since June.
• The firm thinks there will be a supply wall at $68,000, which is where the prices of 3.55 million BTC bought in the last six to twelve months cluster.

Bitcoin (BTC) has been stuck near $65,000 for most of July, and the event most likely to move it is this week’s Federal Reserve meeting, says Bitfinex analysts, into which, by their measure, traders have walked in with almost no protection.

According to them, the options market showed that traders reduced hedges during the crypto market’s rally in mid-July and have not yet reinstated them. The demand for downside protection, as measured by 30-day put skew, compressed from about 6.5 volatility points on July 14 to around 2.2 by July 23, the team said, while the put/call ratio was at a six-month low.

“Downside protection was monetised into the CPI rally and never replaced," the analysts wrote, leaving the market "carrying its least downside insurance since June into a meeting priced for neutrality.

Bitcoin’s price was trading around $65,597 on Monday morning, up over 0.8% in the last 24 hours. On Stocktwits, retail sentiment around it dropped to ‘bearish’ from the ‘neutral’ zone, while chatter stayed at ‘low’ levels over the past day.

Why The Fed Meeting Matters

The Fed is set to announce its interest rate decision on Wednesday, July 29. Markets usually applaud a rate cut, since lower rates make borrowing less expensive, and riskier assets such as Bitcoin more attractive. A cut is completely off the table this time, according to the CME Group’s FedWatch tool. 

The tracker, which follows what futures traders are betting, put the probability of a cut at 0%. As of Monday morning, FedWatch was pricing in a 33.7% chance of a hike and a 66.3% chance of a hold. A week ago, the hike probability was just 16% before firming through last week as a soft inflation print faded from sight.

Realistic outcomes are rates remaining in the current 3.50% to 3.75% range or rising a quarter point, said the analysts. Higher rates are bad for Bitcoin as they provide investors a safe return for holding money elsewhere, making it difficult for risk assets to attract capital.

Analysts at the crypto exchange Bitfinex said "A dovish outcome is not on the menu, so the average trader is not positioned for one and hold is not dovish in a macro-sensitive environment for risk assets." \

According to a Stocktwits poll, 18% of users believe that the main driver of the market this week would be the FOMC meeting, while 49% voted that Iran war negotiations would be the main driver. Around 30% voted for earnings to determine the momentum for the week.

AI And Crypto Correlation

Bitfinex identified demand for Bitcoin ETFs as the primary driver of July's price action. Bitcoin’s daily price moves this month have tracked those flows closely, the analysts said, with a correlation of 0.75. Analysts counter the prevailing theory that Bitcoin is now just a side bet on the AI boom. 

The correlation to the Nasdaq (NDAQ) 100, Nvidia (NVDA) and Alphabet (GOOGL) is real but modest, the analysts said, 0.41, 0.34 and 0.26 respectively over the past 30 sessions, calling the AI comparison “a narrative convenience.” They said that when the stress is in the wider economy and interest rates, then Bitcoin behaves like stocks. When the stress is in the specific stock market, then it behaves differently, said the analysts.

The Wall At $68,000

Bitfinex sees any rally capped at $68,000, the cost bases of the 3.55 million BTC acquired over the last six to twelve months are clustered at the level where underwater holders usually sell into strength. 

Analysts said wallets holding between 100 and 1,000 BTC sold some $5.1 billion worth of coin in May and June, or about five times what ETFs took in during their best week in months. If it’s above $68,000 and funding below 15% annualised, it would turn those holders from sellers to holders, the team said.

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