Liquidity is sluggish and pessimism continues. Will Bitcoin fall to $23,000 next?

Author:Mary Liu

Bitcoin has wiped out all gains since Grayscale won the lawsuit. Bitui terminal data shows that after the news of Grayscale’s victory was announced, Bitcoin once soared to more than $28,000 and has now retreated to around $25,700. In the past 30 days, down 11.4%. Some industry analysts said bitcoin could retrace to $23,000 under the cloud of low trading volume and liquidity.

Extremely low trading volume and liquidity

Bitcoin trading volume and liquidity have been at very low levels recently. Bitcoin spot trading volume on centralized cryptocurrency exchanges (CEX) reached its lowest monthly level since October 2020 in August, according to the latest report from Bitfinex on Tuesday.

“Spot trading volumes by asset have reached historically low levels and have been declining across the board for several months,” the report added. Bitfinex analysts said the metric showed that “Bitcoin and the broader cryptoasset space Confidence is declining."

The Bitfinex report highlights that trading volume and liquidity in the crypto market are currently extremely low. This low-liquidity environment makes crypto markets vulnerable to large price swings, even with low trading volumes.

Derivatives trading volume is 20 times that of spot trading

The Bitfinex report also cites an increase in derivatives exchange volumes in mid-August, corresponding to the liquidation of leveraged positions worth over $1 billion on Aug. 17. Bitfinex said derivatives have been a driver of the current market environment.

It also pointed to data showing spot volumes contracted further than derivatives volumes. Referring to Monday's data, the Bitfinex report said, "Yesterday's data showed that derivatives trading volume on major exchanges was 20 times higher than spot trading volume."

Trading volumes in digital asset investment products also declined. Bitfinex analysts said: “Trading volume in these investment vehicles fell to a total of $1.3 billion this week, 16% below the annual average.”

Bitcoin derivatives show falling demand from bulls

Analyst Marcel Pechman tweeted that Bitcoin monthly futures typically trade at a slight premium to the spot market, suggesting sellers are asking for more money to delay settlement. Therefore, BTC futures contracts in healthy markets should trade at an annualized premium of 5% to 10%, a situation known as contango. And bitcoin's current 3.5 percent contango (basis) is at its lowest since mid-June (before BlackRock's application for a spot ETF), an indicator that reflects falling demand from leveraged buyers using derivatives contracts.

Traders should also analyze the options market to see if the recent correction has caused investors to become less bullish, analysts said. A delta bias of 25% is a telltale sign when arbitrage platforms and market makers charge excessive fees for upside or downside protection.

In short, if a trader expects the price of Bitcoin to fall, the bias indicator will rise above 7%, and the negative bias of 7% is often seen when the market is hot. And the 25% delta bias in options has recently moved into bearish territory, with protective put (sell) options trading at a 9% premium on September 4th compared to similar call (buy) options.

Market pessimism continues

Market pessimism is rising. A brief moment of optimism has faded after news of Grayscale's legal victory with the U.S. Securities and Exchange Commission (SEC) broke last Tuesday. Bitcoin has since given up all of its gains after hitting a recent high of $28,100.

On Aug. 31, the SEC extended the decision deadline for seven ETF applications by 45 days, further dampening investor enthusiasm. There is a growing sense that the U.S. bitcoin spot ETF could face further delays.

The lack of sustained liquidity and trading volumes has caused the key investor sentiment gauge, the Fear and Greed Index, to fall in a downtrend over the past 30 days, shifting from neutral to fearful sentiment. It may take longer than previously expected for the market to get a bullish catalyst.

Dropped to $23,000?

Given the lack of trading activity, Blackfridge Exchange CEO Mike Crosbie said in a Bloomberg interview that the market structure does not inspire much confidence. Crosbie believes: “As long as the $28,000 level remains lost, Bitcoin may fall to around $23,800.”

Historically, September has been a difficult month for the price of BTC, with the cryptocurrency posting negative monthly returns every year since 2016. Crypto asset management firm QCP Capital predicts that the largest crypto asset could drop as low as $23,000 by early October.

However, K33 senior analyst Vetle Lunde said in his report that the current price level ($25,760 at press time) presents a buying opportunity for investors with longer horizons. "By all accounts, this is a buyer's market and it would be unwise not to actively accumulate bitcoin at current levels," he said.