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While it is clear today that the dominant driver of the bitcoin market is its correlation with stock markets, we believe that a real decoupling will take place eventually, and the seeds of this decoupling could probably be sown in the stock market. derivative products.
First, a major development over the past two years has been the “dollarization” of the type of collateral in the derivatives market, eliminating much of the downward convexity that accompanies the majority of collateral being bitcoin itself. -same.
Open Interest Percentages on Bitcoin Collateralized Futures Contracts
While a large liquidation event in the bitcoin market is less likely than in March 2020 solely based on the collateral mix in the market today as well as contract positioning (shown below), it It is clear that global equity and credit markets are in freefall. With this in mind, and the reality that spot markets have absorbed huge selling pressure in recent weeksit would be wise to keep a close eye on the derivatives market in the future.
Bitcoin price weighted by perps funding rate
Final remark
The Federal Reserve is on a mission to reverse engineer the infamous wealth effect, with the idea that falling asset prices will dampen consumer confidence and spending and slow the unprecedented inflation seen around the world.
If global markets are heading towards a breaking point, you can expect bitcoin to come under heavy pressure as well. What is not known is how many bitcoin investors/speculators are still in the market, left to panic, and whether the selling that would occur would be through spot markets or more primarily through short selling via bitcoin derivatives.
In either scenario, it’s likely that a horde of lower shorts will pile in to try and drive bitcoin into the dirt (this can be seen via a deeply negative perpetual term funding rate).
This will eventually lead to a significant rebound in the price of bitcoin and likely a decoupling/outperformance of other risky assets that have been so closely correlated with bitcoin in recent months.
The opportunity is before us.
