Many investors think the rally in bitcoin won’t last—and have placed bets against the token’s price.
Photo: Al Drago/Bloomberg News
Bitcoin was all but left for dead after the implosion of crypto exchange FTX, but its recent rally is proving naysayers wrong.
The world’s largest cryptocurrency has risen 21% so far this month on the back of the banking crisis, bringing bitcoin’s rally to almost 70% so far this year. Bitcoin traded above $28,000 on Sunday for the first time since June.
Bitcoin has surged despite a federal regulatory crackdown on crypto companies and an increasingly risk-averse market environment.
Many investors think the rally won’t last—and have placed bets against the token’s price.
Amid bank turbulence last week, investors added a record $35 million into exchange-traded products that bet against bitcoin, according to data compiled by crypto asset manager CoinShares.
Still, the banking turmoil rattling global financial markets has boosted the confidence of investors who view the digital currency as an alternative to the traditional banking system.
“Narratives are more powerful in crypto in generating real price movements than any other asset class,” Clara Medalie, director of research at Kaiko, said. “No matter what your thoughts on how powerful that narrative is, people actually believe this.”
An anonymous internet user named Satoshi Nakamoto launched bitcoin in 2009, on the heels of the global financial crisis. The cryptocurrency initially attracted interest from a niche group of investors following bank failures and government rescues. While its popularity has grown among speculative investors in the roughly decade-and-a-half since, it has retained a status among some as being an asset more removed from the banking system than stocks and government bonds.
“When you see the banking system in peril, you realize that bitcoin was really invented to create independence from those risks and to get away from the whims of central banks,” said Michael Safai, managing partner at crypto high-frequency trading firm Dexterity Capital.
Bitcoin’s rally has been driven by a small number of wealthy crypto investors. On Monday, the number of bitcoin buyers and sellers was near its lowest point since summer 2022, according to Kaiko. When markets have fewer traders, it can lead to outsize moves—higher and lower.
These investors bought bitcoin on hopes that the Fed may slow its pace of interest-rate increases and benefit bitcoin, said Ms. Medalie.
“A lot of people in crypto think that interest rates are turning around and that’s going to be great and spark a new bull run,” Dexterity Capital’s Mr. Safai said.
In contrast to bitcoin’s recent rally, the bearish sentiment on the token has been building up for a while.
Some investors bought bitcoin on hopes that the Fed will slow its pace of interest-rate increases, which could benefit the cryptocurrency.
Photo: Samuel Corum/Bloomberg News
“Investors are becoming more proactive with short positions,” said
James Butterfill, head of research at CoinShares. “That’s not a trade that has done particularly well this year given the price increases, yet people are quite active in it.”
Mr. Butterfill noted that crypto investors have been particularly sensitive to regulatory and interest-rate developments. They tend to pull money from long-bitcoin funds while adding to short-bitcoin products after the Federal Reserve announces interest-rate increases and regulators take action against crypto companies.
Since regulators started to crack down on some of the biggest crypto players, investors have pulled about $424 million from global exchange-traded products that track the price of bitcoin while adding around $45 million into ETPs that track the inverse of bitcoin’s price, according to data compiled by CoinShares for the six weeks ended March 17.
So far this year the investors who have bet against crypto have lost.
ProShares Short Bitcoin Strategy ETF, which tracks the inverse of the daily performance of the S&P CME Bitcoin Futures Index, has declined 46% this year, according to Morningstar data as of Monday.
Shorting crypto stocks also hasn’t been a profitable trade. Short sellers borrow shares and sell them on the open market, hoping to buy them back at a lower price and pocket the difference as profit.
Investors betting against crypto exchange Coinbase Global Inc. and bitcoin-buying software intelligence firm MicroStrategy Inc. were down 76% and 62%, respectively, this year, according to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.
Coinbase and MicroStrategy are among some of the most heavily shorted crypto stocks. About 23% of Coinbase’s shares available for trading were sold short, while 33% of MicroStrategy’s shares available for trading were sold short, according to S3 Partners data as of March 17.
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Crypto’s recent rally has lured some investors back into the market. Open interest in bitcoin options on the crypto derivatives exchange Deribit reached a record high of 388,000 with a notional value of about $11 billion, according to data from the exchange. Open interest—the number of unsettled and active futures contracts trading on exchanges—measures market sentiment and strength behind price trends.
Some investors remain cautiously optimistic about the trajectory of bitcoin’s price, especially as it has surged against the backdrop of a banking crisis.
Todd Morakis, co-founder of digital-asset financial-services firm JST Digital, said his firm bought some bitcoin before the recent rally and is assessing whether it is time to take some profits off the table.
“The whole idea of owning bitcoin, at least initially, is that people weren’t trusting the banking system,” Mr. Morakis said. “But I think we will follow the lead of the U.S. stock market.”
Write to Vicky Ge Huang at vicky.huang@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com
Source: wsj.com