The current rally in Bitcoin has all the hallmarks of a "hated rally" with many sidelined investors who had been conditioned to short with conviction or rotate into fiat exposure in anticipation of further downside.
The current rally in Bitcoin has all the hallmarks of a "hated rally" with many sidelined investors who had been conditioned to short with conviction or rotate into fiat exposure in anticipation of further downside. This has caused a short squeeze and subsequent strength in BTC, resulting in a recovery to pre-November price levels and pushing the RSI to multi-year highs, a potent signal of changing momentum.Moreover, several noteworthy market tendencies have occurred over the last couple of weeks. The Grayscale discount has recovered from -48.5% to -36.3% year to date; bitcoin has experienced strength during Asian market hours; CME futures are trading above spot, and the term structure has normalized, while institutional participation in BTC futures is on the rise.
We anticipate that volatility will subside in the short-term, partly due to developments in Binance's BTCUSDT perp. Throughout the past week, open interest saw several sharp retracements coinciding with market strength as shorts covered. Additionally, as prices temporarily stabilized, open interest gradually grew as traders entered new shorts, expecting retracements in BTC. Nevertheless, the strength persisted, and shorts acted as a catalyst, further driving the prices up as shorts covered.
At present, shorts are not providing much of an impetus to push prices higher in the short term. Open interest has stabilized, with no notable growth after BTC recovered to above $20,000, indicating that short traders have learned from last week's unprofitable endeavors.
A burgeoning RSI supports our view of stabilizing markets in the near term. The relative strength index, a momentum indicator, ripped higher throughout the last week and pushed toward 2019 highs. This supports that the rally is extended in the short term. However, it also represents the first proper signal of strengthening momentum in BTC since the bull market of 2021.
The current recovery resembles BTC’s initial recovery from the depths of the 2018 bear market. After RSI pushed above 80 in April 2019 following a relative volatility compression in March, BTC stayed rangebound for 40 days. Now, BTC has recovered to its Q3 range, the RSI is extended, and shorts are cautious, increasing the likelihood of near-term stability.