Cryptocurrency Derivatives Series: Key Driving Forces of Bitcoin And Hedging Strategy

Is crypto bulls back in 2020? For those who are risk averse and obsessed to say too early to conclude that, the early signs are only good. However, we listed out some significant factors that drive further trend direction of bitcoin and other major crypto pairs.

The Key Driving Forces of BTCUSD In Rest of H1’2020:

  • Bitcoin Block Reward Halving 
  • Contagious Coronavirus Outbreak 
  • CME & Bakkt’s BTC Derivatives Instruments (BTC Futures & Options) Getting Traction 
  • Economic Slowdown 
  • Low FX Vols
  • Fed causing ‘deflation crisis’ will in-turn drive bitcoin’s upside price traction

Quick Briefing: The crypto investment ecosystem has matured since 2017 and the investor community has become more sophisticated. The latter case is quite evident by the all-time highs of open interest for Bakkt Bitcoin futures and all-time high trading volumes of CME Bitcoin futures in the recent past. 

In addition, there are more institutional on-ramps and regulated crypto investment vehicles out there, which enable a broader investor base to take part in the next crypto bull market.

Moreover, the implied FX volatility has constantly been lacklustre, IVs (implied volatilities) are falling quite often owing to the concerns surrounding risk-off sentiments due to the global economic slowdown, coronavirus threat and unsettled geopolitical issues (except US-China trade deal). The historic lows seen last month have almost been reached again.

Most importantly, the US Federal Reserve is inclined to infuse billions into the financial system as it grew its balance sheet from $3.7 trillion to nearly $4.2 trillion within a short span, consequently, it leads to low or negative yields, deflationary environment. As a result of this, the prudent investors look out for new alternative investment avenues just like bitcoin. 

Hedging Strategy:

Bitcoin price (BTCUSD at Coinbase exchange) has shown 3rd consecutive weeks’ bullish steaks from the lows $8,556.60 levels to the prevailing 10,500 levels and is now on the verge of hitting 5-months highs.

Thus, the projection for the upside risks in the underlying security price up to the retest of $13k mark remains intact and accordingly, long hedges were advocated using CME BTC Futures. It is unwise to count the chickens before they hatch, if we keep speculating on the next upside target. Instead, uphold long hedges for now.

Fundamentally, with the Bitcoin Halving less than 3-months away and mounting speculation the halving may be a major catalyst for further bullish momentum the crypto markets have roared into life in Q1.

Upholding the above recommended positions is wise strategy by rolling over CME BTC Futures contracts of March deliveries on hedging grounds. Please be noted that on a fresh long build-up (rising price) coupled with the rising open interest and rising volumes is conducive factor from the contract holders’ perspectives.

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