 January 21, 2021  Everything you need to make sense of the crypto markets and beyond Sponsored By:  By the CoinDesk Markets Team Edited by Bradley Keoun If you were forwarded this newsletter and would like to receive it, sign up here. Bitcoin (BTC) -8.2% $32,502 Ether (ETH) -9.4% $1,248 (Price data as of Jan. 21 @13:16 UTC) TODAY:
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Price Point Bitcoin (BTC) was lower for a third straight day, slipping below the $34,000 level that had been seen as a market floor in recent weeks.
"Downside volatility struck," Lennard Neo, head of research for the cryptocurrency-focused Stack Funds, wrote Thursday in a weekly newsletter.
In traditional markets, European share indexes rose ahead of a press conference with European Central Bank President Christine Lagarde, after a meeting in which officials left interest rates unchanged and said they might not use the entirety of a pledged asset-purchasing program if it's not needed.
In the U.S., stock futures pointed to a higher open after major indexes surged to new records Wednesday as Joe Biden was peacefully sworn in as the new U.S. president despite law-enforcement warnings over the past week that some protests might turn violent.
Market Moves Bitcoin prices have fallen over the past couple weeks, and cryptocurrency analysts are suddenly turning bearish. In the short term, at least.
Even prices for ether (ETH), the second-biggest cryptocurrency after bitcoin, seemed to lose momentum after surging Tuesday to eclipse the record level that had held since early 2018.
"Bitcoin volatility is not going away anytime soon, but right now it seems the cryptoverse is in for a lot more pain in the short-term," Edward Moya, of the foreign-exchange brokerage Oanda, told clients in an update.
The mood on Wednesday contrasted with the ebullience witnessed in traditional markets, as a new era of U.S. politics began with the swearing-in of President Joe Biden and the departure of Donald Trump. U.S. stocks rose to fresh record highs, with both Bloomberg and Reuters reporting that investors see Biden and his team wasting little time in pushing for a new trillion-dollar round of economic stimulus.
The expectation of further stimulus – and Federal Reserve money printing to finance the government spending packages – has been a major bullish theme driving big investors toward bitcoin; the cryptocurrency has been increasingly cast as a hedge against inflation, due to supply limitations that are hard-coded into the underlying blockchain network.
This week, though, such speculation hasn't been able to thwart the growing conviction among analysts that a correction is brewing in cryptocurrency markets, or already underway. Not even Biden's first-day freeze of a controversial crypto-wallet rule could turn the tide, nor could the news that BlackRock, the world's biggest money manager, has added bitcoin to its investment mandate.
"Don’t be entirely surprised if bitcoin revisits sub-$30k territory before the next advance," Charlie Morris, CEO of the cryptocurrency fund manager ByteTree, wrote Wednesday in his weekly newsletter.  Chart of cumulative year-to-date price returns compares bitcoin (orange line) with ether (teal) and the Standard & Poor's 500 Index of large U.S. stocks (blue). (TradingView/CoinDesk) Bitcoin prices have climbed 13% in just the first few weeks of this year, and ether has soared a staggering 70%. Contrast those gains with the performance in the Standard & Poor's 500 Index of large U.S. stocks, which is up just 2.6% year-to-date even after the inauguration-day rally.
So it could be that the rally in cryptocurrencies just went too far, too fast. Earlier this week, a Bank of America survey revealed that investors saw "long bitcoin" – shorthand for bets that the cryptocurrency's price will rise – as the "most crowded trade" in global markets. It's a sign of just how bullish everyone had become.
"The market is having what is known as 'a breather,'" Matt Blom, head of sales and trading for the cryptocurrency exchange Diginex, told clients.
UBS, the giant Swiss bank, penned a report on bitcoin last week enumerating several reasons to approach the market with caution.
For starters, the bank's analysts said they're "skeptical of any essential real-world use cases, which makes it hard to estimate a fair value for bitcoin." They also outlined the possibility that bitcoin might end up as the crypto industry's version of Netscape and Myspace – examples of network applications that enjoyed success during the early days of the Internet but have since faded. "While the supply of an individual token might be limited, the supply of cryptocurrencies as an asset class is infinite," they wrote.
"The price increases in recent weeks have been extreme by every standard we can think of," according to the UBS analysts.
By and large, most crypto investors remain long-term bullish – just increasingly convinced that short-term turbulence will highlight the short-term downside.
“Bitcoin will almost certainly continue upward eventually, but everything needs to pause here and there,” Michael Stark, a market analyst at FX broker Exness, told CoinDesk's Daniel Cawrey. - Bradley Keoun
Bitcoin Watch  Bitcoin daily price chart shows breakdown of "contracting triangle" pattern and the RSI indicator slipping into the bearish zone with a reading below 50. (TradingView/CoinDesk) Bearish signals have appeared in price charts as bitcoin breaks lower.
As reported in Bitcoin Watch earlier this week, prices had been trading recently in an ever-narrowing range, forming a pattern known as a "contracting triangle." (See chart above.) And with Thursday's move, prices broke below the lower edge of the triangle pattern, considered a bearish sign.
Another technical indicator, the 14-day relative strength index (RSI), has also slipped into the bearish zone, below 50.
And as prices declined Thursday, bitcoin options traders appeared to be hedging against further downside risk.
The one-week put-call skew, which measures the spread between prices of short-term puts (bearish options contracts) and calls (bullish contracts), has risen to a five-week high of 14%. The skew had bottomed out near an extremely bullish -33% just a week ago, according to data source Skew.
One-, three-, and six-month skews have also climbed from recent lows, but are still in bullish territory. The shift is the result of increased demand for downside hedges, or puts, alongside significant selling in bullish calls.
Over 380 contracts of the Jan. 29 expiry $30,000 calls were bought on Thursday, Swiss-based data analytics platform Levitas told CoinDesk. Meanwhile, call selling accounts for nearly 50% of total trading volume on major exchanges, according to Skew.
Bearish bets or puts have been drawing bids since Tuesday. Put options at $32,000 and $36,000 strikes saw high demand on Wednesday, according to Deribit Insights. Someone bought more than 600 contracts of the Jan. 29 expiry put options on Tuesday. - Omkar Godbole
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