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A brief analysis of potential risks in the Bitcoin market from three perspectives of spot volatility, derivatives and macro environment.
Original title: ” Three risks after Bitcoin hits a record high “
Written by: Joe Wang
This article is authorized to reprint from LongHash to Chain Wen
As of December 2, the spot price of Bitcoin has risen from the annual lowest price of approximately US$3782 to approximately US$19,880, a record high. The digital currency market has accelerated. According to CoinMarketCap data, the total market value of digital currency has increased by about 200% during the year.
The rapid increase in the price of Bitcoin comes from its value being gradually recognized by the mainstream business ecosystem. For example, the founder of Twitter and Square, Jack Dorsey, promoted Bitcoin in Silicon Valley, calling it the next generation of Internet native currency, and publicly buying 5000 Ten thousand dollars in Bitcoin. Of course, in addition to the Internet circle, there are also Bitcoin trusts launched by financial institutions such as Grayscale in the United States to help traditional financial institutions obtain Bitcoin asset allocation.
The volatility of the digital currency market is higher than that of the traditional financial market, which is suitable for investors with higher risk appetite.
As the price of Bitcoin hit a record high, I will briefly analyze the potential risks from three perspectives: spot, derivatives and macro.
Since November, Bitcoin’s volatility has risen significantly, and its current annualized volatility in the past 30 days is about 71.21%, while the average value in October is only 36%. With the sharp increase in Bitcoin’s volatility, the entire digital currency market has become active again. One of the largest digital currency trading platforms, Binance’s Bitcoin transaction volume, hit a new high on November 19, with a total platform transaction volume of approximately US$25 billion, and Continue to refresh records in the following days.
Price volatility and the increase in trading volume usually represent an increase in the degree of divergence between the two parties in the market on the pricing of the subject matter. With the monthly volatility reaching a 5-month high, the market is facing more uncertainty.
Position changes in the derivatives market
2020 is a year when Bitcoin derivatives are widely accepted by mainstream hedge funds. Traditional financial institutions gain exposure to Bitcoin through futures derivatives of CME, the world’s largest derivatives trading platform. According to the CFTC disclosed on March 30, the flagship fund of quantitative giant Renaissance Technologies entered the bitcoin futures market. On August 18, 2020, CME’s Bitcoin position hit a record high of more than 70,000 Bitcoins. The entry of professional hedge funds into the market represents a highly specialized market.
The net positions of hedge funds trading bitcoin futures on CME Chicago Mercantile Exchange are usually net short positions. According to skew analysis, hedge funds mostly use cash and carry strategies to earn premiums (high premiums in futures represent optimistic market expectations) . According to the CoT report released on November 24, 2020, the current net short position of leverage (hedging) funds is approximately 22,115 BTC short, and the net long position of retail accounts is 11,585 BTC long. The net short position of hedge funds has reached a historical high and the short selling sentiment is beginning to appear. .
At present, the total open interest in the BTC futures market is about 6.3 billion, an increase of 133% since the beginning of the year and continues to set a new record high. Unlike the spot market, the increase in open positions of derivatives in the zero-sum game indicates the degree of disagreement between the two parties on the spot target. .
The impact of the macro environment
The similarity between the gold market in the 1970s and the current Bitcoin was mentioned in a recent Citibank institutional report. He also pointed out that violent price fluctuations are one of the characteristics of Bitcoin, “and it is a long-term trend.”
As the price of gold fell to a 4-month low after breaking through a record high, rising market risk appetite (risk-on) pushed the S&P index to record highs. According to the skew report, we analyzed the price of BTC in traditional financial markets such as the US stock market. The impact of changes is increasing, and the most active trading hours of BTC recently are during the opening hours of US stocks.
With the increasing influence of “new” North American participants (institutions, individuals) on BTC prices in 2020, the excessively positive sentiments of market participants and the uncertainty from North America and the macro environment, such as Covid-19, after the US election Changes and even “seasonal factors” inject more uncertainty into the digital currency ecosystem that is still in its early stages.
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