Brace for wild swings as Bitcoin nears two-year high, Fidelity says

Bitcoin traded around its highest level in nearly two years overnight, changing hands for more than $47,000 on some exchanges. While price action has picked up, volatility remains low — and that could all be about to change.

Under the hood

Increased activity in derivatives markets and a changing macroeconomic backdrop could lead to increased volatility in crypto markets, according to analysts.

Bitcoin’s volatility has been low despite its 170% increase in the past year, but “under the hood, some participants are getting quite bullish,” Chris Kuiper, director of research at Fidelity Digital Assets, said on X Monday.

Metrics in Bitcoin derivatives, such as perpetual futures funding rates, are approaching levels last seen between October and November of 2021.

Funding rates are the mechanism used to ensure that perpetual contracts — which have no expiration date and trade in perpetuity — track spot prices accurately.

If the rate is positive, traders with long positions will pay traders holding short positions to maintain their positions. The opposite is true if rates are negative. High funding rates suggest leverage in the market is overstretched — which happened last week prior to Bitcoin plunging 5%.

Market participants can expect more volatility going forward if funding rates remain elevated.

‘Things are starting to heat up under the surface, expect more volatility ahead’

—  Chris Kuiper, director of research at Fidelity Digital Assets

Open interest, the number of outstanding contracts, for Bitcoin futures has also moved up along with price. Trading activity is yet to catch up though, Kuiper noted.

“Things are starting to heat up under the surface, expect more volatility ahead,” Kuiper said.

As well as increased activity in derivatives markets a mood change from major central banks poses another risk.

The US Federal Reserve signalled it could change its monetary policy in the coming months, after a period of interest rate hikes.

However, the Fed is still far from reaching consensus on when to begin cutting rates again, analysts at crypto exchange Bitfinex told DL News.

“The Fed’s decision-making process appears to be far from linear,” analysts at the exchange said.

Projections from the Fed’s members range from maintaining current rates — above 5% — to up to four cuts this year.

Bitcoin exchange-traded-funds will also play a role in the coming months. ETF experts expect the Securities and Exchange Commission to greenlight a host of Bitcoin spot ETFs, making the top crypto asset widely more available to US investors.

Crypto market movers

• Bitcoin traded around $46,800 by 2pm UK time, up 4.4% since Monday.
• Ethereum gained 0.7% to trade just below $2,300.

What we’re reading

• Inside the crypto war rooms where sleuths probed $91m in hacks the first week of the year — DL News
• Bitcoin gets boring — and why that’s a good thing for Wall Street — DL News
• North Korea’s Lazarus Group Moves Bitcoin As BTC Breaches $47,000 — Milk Road
• SEC Chair Gensler Issues Caution On Crypto As Bitcoin ETF Decisions Loom — Milk Road
• SEC Issues Additional Comments on Spot Bitcoin ETF Applications — Unchained

Tom Carreras and Adam Morgan are markets correspondents for DL News. Got a tip about the Federal Reserve, ETFs, or Bitcoin? Reach out to tcarreras@dlnews.com or adam@dlnews.com