Bitcoin Short Bets Are Building – Here’s What That Means for the BTC Price

Short Bitcoin investment products saw an inflow of nearly $10 million last week, according to CoinShares’ latest Digital Asset Fund Flows Weekly Report. That took month-to-date flows to $14 million. Meanwhile, over the same time period, long Bitcoin investment products saw an outflow of close to $12 million, taking month-to-date outflows of $16.8 million.

Ethereum, Litecoin, Solana, Polygon, Multi-asset and other cryptocurrencies saw their related investment products saw net flows of close to zero, highlighting how recent pessimism has been largely concentrated on Bitcoin. In terms of flows by region, the US saw outflows of nearly $14 million. “We believe this reaction reflects nervousness amongst US investors prompted by the recent stronger than expected macro data releases, but also highlights its sensitivity to the regulatory crackdown in the US”.

A string of much stronger-than-expected US data releases this month, including the likes of the January jobs and ISM reports, as well as the January CPI and Core PCE inflation reports, has markets betting on significantly more tightening from the Fed this year than this time last month. As per money market data presented by the CME, the market’s new base case is that rates reach nearly 5.5% before the end of H1 this year. One month ago, markets had been expecting rates to peak in the 5.0% area.

Retail Investors Not Panicking Yet, Funding Rates Imply

Larger scale investors, who tend to utilize crypto investment products more heavily than retail investors, have clearly turned more pessimistic, particularly in the US amid growing macro headwinds. But Bitcoin’s ongoing resilience is impressive, with the world’s largest cryptocurrency last changing hands in the low $23,000s, still up over 40% for the year and still slightly in the green on the month.

That could partially be explained by the fact that retail investors don’t seem to be turning bearish, as per Bitcoin futures funding rate data presented by crypto derivatives analytics website coinglass.com. According to coinglass.com, Bitcoin funding rates remain largely positive, suggestive that traders looking to go long Bitcoin futures are paying a premium versus those looking to go short.

Likewise, Bitcoin options markets are also sending a signal that broader pessimism towards the world’s largest cryptocurrency hasn’t seen a notable jump this month. The 25% Delta Skew of Bitcoin Options expiring in 7, 30, 60, 90 and 180 days all remained slightly above zero on Friday, indicating that options investors have a net neutral view on the market.

The 25% delta options skew is a popularly monitored proxy for the degree to which trading desks are over or undercharging for upside or downside protection via the put and call options they are selling to investors. Put options give an investor the right but not the obligation to sell an asset at a predetermined price, while a call option gives an investor the right but not the obligation to buy an asset at a predetermined price. 

A 25% delta options skew above 0 suggests that desks are charging more for equivalent call options versus puts. This implies there is higher demand for calls versus puts, which can be interpreted as a bullish sign as investors are more eager to secure protection against (or bet on) a rise in prices.

What Next for the BTC Price?

The jump in investment into short Bitcoin investment products, as per CoinShares, while not seemingly weighing on broader market sentiment too much, may provide fodder for a further squeeze on shorts in the weeks and months ahead. Bitcoin’s resilience to recent macro headwinds has been impressive and may be down to the fact that, according to multiple on-chain and technical indicators, the cryptocurrency became way too oversold in late 2022.

Bitcoin’s snap back in 2023 might, more than anything, just be a return to the levels where it probably should have been trading all along (i.e. in the $20Ks, not the mid-$10Ks). In terms of the cryptocurrency’s short-term outlook, things are still looking relatively upbeat in wake of January’s decisive break above the 200-Day Moving Average and “golden cross”, with Bitcoin still also seemingly moving higher within the confines of an ascending trend channel.

So long as upcoming US data releases in early March, like this week’s ISM reports and next week’s official jobs data release, don’t provide any fresh hawkish shocks, BTC might continue grinding higher amid optimism the 2022 bear market is over. A break above $25,000 could open the door to a push higher towards $28,000.