3 reasons why Bitcoin is probably heading below $16,000

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December will likely be remembered by Bitcoin (BTC)’s false break above $18,000, but other than that brief overshoot, its trajectory was entirely bearish. In fact, the downtrend currently offering resistance at $18,850 could take the price of BTC below $16,000 by mid-January.

Bitcoin/USD price index, 12 o’clock. Source: Trading View

A handful of reasons may explain the negative move, including the announced withdrawal of the Mazars Group audit firm from the cryptocurrency sector on December 16. The company previously handled proof of reserve auditing services for Binance, KuCoin, and Crypto.com.

In addition, we can cite the bankruptcy of one of the largest cryptocurrency miners in the United States, Core Scientific. The publicly traded company filed for Chapter 11 bankruptcy on Dec. 21 due to rising energy costs, increased competition, and falling Bitcoin prices in 2022.

The liquidity crunch at crypto lender and trading desk Genesis Global and its parent company, Digital Currency Group (DCG), has sparked fear among investors. More importantly, DCG manages the $10.5 billion Grayscale Bitcoin Investment Trust (GBTC). The fund is currently trading at a 47% discount to its net asset value, in part due to investor speculation over its exposure to Genesis Global.

Negative pressure from US Federal Reserve tightening

Besides the bearish news flow, the macroeconomic scenario deteriorated after the US Federal Reserve raised interest rates by 50 basis points on December 14th. Analysts including Jim Bianco, director of institutional research firm Bianco Research, said the monetary authority would maintain its monetary tightening. policy in 2023.

Investors fear that Bitcoin could fall below the current downtrend support at $16,100, triggering a sharp correction. Cryptologist TH3, a veteran crypto trader, points out that a descending wedge could cause a low of $14,000 by February 2023.

On TF daily I can see this turning into a descending wedge with a potential bottom forming in the 14k area. $btc #bitcoin pic.twitter.com/dpPVZZy5Vk

— TH3 Cryptologist (@TH3Cryptologist) December 29, 2022

But let’s also look at Bitcoin derivatives data to understand if recent price action and news has had an impact on crypto investor sentiment.

Demand from leveraged Bitcoin buyers remains to be seen

Retail traders generally avoid quarterly futures because of their price difference from spot markets. Meanwhile, professional traders prefer these instruments because they prevent the fluctuation of funding rates in a perpetual futures contract.

The annualized three-month futures premium should trade between +4% and +8% in healthy markets to cover the associated costs and risks. So when futures are trading at a discount to regular spot markets, it shows a lack of confidence on the part of leveraged buyers, a bearish indicator.

Annualized 3-month Bitcoin futures premium. Source: Laevitas.ch

The chart above shows that derivatives traders remain bearish while the Bitcoin futures premium is negative. Even more worryingly, even the December 14th $18,000 pump was unable to move these whales and market makers to balanced leverage demand between long and short positions.

Still, the lack of demand from leveraged buyers does not necessarily indicate that traders expect immediate adverse price action. For this reason, Bitcoin options markets should be analyzed to rule out externalities specific to the futures instrument.

Related: $8,000 Dive or $22,000 Rebound? Bitcoin traders anticipate BTC price action in Q1

Options traders learn about downside risks

The 25% delta skew is a telltale sign when market makers and arbitrage desks overcharge for upside or downside protection.

In bear markets, option investors give higher odds for falling prices, causing the bias indicator to rise above 10%. On the other hand, bullish markets tend to push the bias indicator below -10%, which means bearish puts are discounted.

Bitcoin options 30 days 25% delta skew: Source: Laevitas.ch

The delta skew peaked at 23% on December 29, signaling that options traders are not comfortable with downside risks.

As the 30-day delta skew stands at 18%, the options and futures markets are indicating that professional traders are concerned that the $16,100 support is likely to be tested.

Therefore, the reasons for investors’ decline are the pursuit of higher interest rates, the lack of demand from leveraged buyers, and the positioning of BTC options traders for more decline.

The views, thoughts and opinions expressed herein are the sole authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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