Bull Run's Back Baby: Strategies for Seasoned Traders

Region: Europe
Jan 8, 2024, 6:40:47 AM Published By Yves Renno

The strong likelihood of experiencing another bull run in the cryptocurrency market in Q2 2024 is supported by various fundamental and market indicators. Several macro and crypto-specific events are anticipated to propel the market upwards, reaching new all-time highs in 2024:

The highly anticipated decision by the Securities Exchange Commission (SEC) regarding the approval of the first US Bitcoin ETF is scheduled before January 10th. The short-term impact of an SEC approval is uncertain, as some analysts predict a 'sell the news' behaviour. In other words, asset managers and traders might unwind their positions and take profit after the SEC announcement. There is a clearer consensus over the medium to long-term impact of an approval that supports a bull run in 2024.

Institutions have been investing heavily in Bitcoin-linked funds during the last quarter of 2023, creating an 11-week record run of inflows, according to Coinshares. More than $1.8 billion has been invested this year. Institutional investors have increased their involvement in the crypto space over the past few years. From investment banks to corporate treasuries, the fear of missing out 'again', coupled with clients' requests to allocate a portion of their portfolios to cryptocurrencies, is too high to ignore.

US inflation appears to be under control, approaching the 2% YoY target rate. There would be no reason for the Fed to keep the key interest rate high, as it could eventually weigh down on growth. The Fed could start cutting rates as early as March 2023, but more likely in Q2 2024, given that the US economy is already in good shape: the unemployment rate is low at 3.7%. A higher growth could positively impact every investment sector, including cryptocurrencies. Indeed, high-interest rates tend to divert investments away from cryptocurrencies into safer traditional ‘value‘ investments. Instead, low-interest rates would favour ‘growth’ investments in cryptocurrency projects.

The next Bitcoin halving event is expected in April 2024. Bitcoin halving events are pivotal to the cyclicity of the crypto market, coinciding with all three major bull runs observed in the past 10 years. The Bitcoin logarithmic performance graph below illustrates the last three bull runs that followed Bitcoin halving events (green vertical lines). Bull runs have been losing steam over the years. Based on this graph alone, if another bull run occurs in Q2 2024, its amplitude would unlikely exceed the previous one. It could even turn out to be quite disappointing in comparison.

During the 2011-2012 bull run, the Bitcoin price multiplied by 55 in 16 months. It multiplied by 30 and then by 7 respectively in the 2016-2017 and 2020-2021 bull runs. Given the drop of this bull run ‘multiplicator’, should we only hope for the Bitcoin price to double (to ~$90,000) in the next 2024-2025 potential bull run?

There is certainly enough ground this time around to support another serious market rally in 2024-2025 that could catapult the Bitcoin price above the $100,000 level.

Navigating the Crypto Bull Run: Expectations from derivative markets Expectations from option markets The Bitcoin option market has grown substantially this year. The daily Open Interest reached a new all-time-high at 523,000 BTCs in March, and surged 3 times above 500,000 level in October and November according to Coinglass.

There are more experienced participants involved in the Bitcoin options markets with their own informed view on the Bitcoin price direction. The positions they hold can give us valuable information: more specifically, they provide us with a probability to reach a price level at a specific time horizon. The graph below, produced by Coinglass, distributes by strike the Open Interest of all Bitcoin options expiring in June 2024 on the Deribit exchange. The concentration of Open Interest within the strike range of $55,000 to $100,000 reflects a high expectation to see the Bitcoin price exceed $55,000 before the end of June, and a high expectation to fall within the $55,000 to $100,000 range only 2 months after the halving event.

Given that past bullish trends have extended for approximately a year and a half, if the price of Bitcoin approaches the $100,000 level by June and the bullish momentum persists for a similar duration, the potential for further gains after June remains optimistic. Of course, market expectations evolve over time as traders adapt their views to the flow of information. And the put-call ratio can help us weigh the most significant changes. Put options involve the right to sell Bitcoin at a specified strike level upon expiration, typically traded at strikes below the current Bitcoin price, capturing a bearish sentiment.

On the other hand, call options confer the right to buy Bitcoin at a designated strike level upon expiration, usually traded at strikes above the prevailing Bitcoin price, reflecting a bullish sentiment. The higher the put-call ratio the more bearish the sentiment. During the 2020-2021 bull run, the put-call ratio peaked at 0.94 in April 2021, when Bitcoin was trading near the $60,000 level. If the put-call ratio gets anywhere near the 0.9 level, it is reasonable to assert that market expectations would have definitely shifted.

Additional useful indicators can also be utilized to navigate a potential bull run. The greater the speculation at a specific Bitcoin price level, the more probable it is that Bitcoin will revisit this price level after the bull run, on its way down. Bitcoin ‘Perpetual future’ (perp) contracts are instruments that track the Bitcoin spot price. A ‘funding’ mechanism is used to prevent the contract’s price from deviating significantly from the spot price. If the contract price is above the spot price, long traders pay short traders a funding fee every hour. On the contrary, if the contract price is below the spot price, short traders pay long traders a funding fee every hour. The wider the spread between the perp and the spot, the higher the funding fee. Looking at the historical spread between Bybit’s perp and spot during the 2020-2021 bull run, we can see it reach a first peak on January 4th (spread ~ 1.7% of the spot price at $38,174), and its highest peak before the market correction on October 25th, 2021 (spread ~ 2% of the spot price at $61,359).

Risk Management in a Booming Market: Protecting Profits and Minimising Losses

While selling at the peak is practically unattainable, it is valuable to consider taking profits prematurely, particularly during periods of high market speculation when the perp to spot spread peaks. And one of the best short-term solutions to lock a profit in a bull run is to sell the overpriced perp on reliable centralized exchanges.

At Wirex, the Multiply product provides an alternative approach to selling Bitcoin through a recursive loan mechanism. However, it is crucial to: choose a multiplier that is appropriate for the market volatility observed. A low multiplier with wide enough maximum take-profit and stop-loss levels would be a more reasonable solution in a highly volatile market regime. Otherwise, the user risks having the product hit the stop-loss prematurely. hold the position for a rather short period of time (e.g. a few days max) in order to avoid paying too many rollover fees (charged every hour). Although the target profit should comfortably cover the amount charged. Of course, trading requires discipline: target goals and levels should be relatively stable. It is also essential for every user to set target levels that are reasonable, and suitable to their risk appetite and wealth.

*The prices of Cryptoassets fluctuate, sometimes dramatically. The price of a Cryptoasset may move up or down and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling Cryptoassets.

*The value of cryptoassets may fluctuate significantly over a short period of time. The volatile and unprecedented fluctuations in price may result in significant losses over a short period of time. Any Cryptoassets may decrease in value or lose all its value due to various factors including discovery of wrongful conduct, market manipulation, change to the nature or properties of the Cryptoasset, governmental or regulatory activity, legislative changes, suspension or cessation of support for a Cryptoasset s or other exchanges or service providers, public opinion, or other factors outside of our control. Technical advancements, as well as broader economic and political factors, may cause the value of Cryptoasset s to change significantly over a short period of time.

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