Bitcoin Now Awaits The ‘First Week of the Year Effect’ After Lack of ‘Santa Claus’ Rally

The market is struggling to turn bullish as price takes a dip ahead of massive year-end options expiry on Friday, with the “max pain” point at $48k.


Bitcoin took a dip back towards $47,300 on Tuesday, unable to keep the gains made on Monday when it briefly hit $52k. While Bitcoin is down nearly 31% from its all-time high of $69,000, Ether, which dropped back to $3,760, is 22% off its $4,880 ATH.

These two major crypto assets continue to trade in a range, unable to rally into the year-end. Even the stock market is doing better than these leading cryptos.

The S&P 500 hit a record high on Monday but is now showing signs of petering out. Now, the dollar is inching up, but with traditional market traders taking time off for Christmas for the end of the year, it’s better not to read too much into the moves.

“Things are mostly noise right now, though we are probably seeing a soft risk-on/risk-off dynamic going on with stocks down slightly, and the dollar has caught a bid on the inverse of that,” said Kyle Rodda, an analyst at IG Markets.

But unlike the S&P 500, Bitcoin failed to see a ‘Santa Claus rally,’ and the next thing the crypto market is looking for is the gains that come in the first ten days of the month and the year.

As trader and economist Alex Kruger noted, it is the ‘first week of the year effect’ that saw Bitcoin’s returns in the first week of 2021 at 36%, 13% in 2020, 7% in 2019, and 18% in 2018.

“Still expect a strong crypto up market in early Jan driven by fund inflows. Then risk-off ahead of the next FOMC (Jan/26) if the next inflation print comes in too hot (Jan/12),” Kruger added.

But as Bitcoin is on course for its worst monthly drop since the rout seen in May, down 16.5% in December, less than Ether’s more than 18% loss, many are struggling to be a bull.

“A similar purely deriv phenomena (at diff magnitude) I see dec-4-2021 vs. sep-24-2019 nuke is pre-nuke mkt ran out of longs opening (apes gone?), post nuke still the same, funding flipped flat (once in a while, mildly negative), no apes to re-ape mkt back into froth, big chop maybe,” stated trader CL of eGirl Capital.

https://twitter.com/CL207/status/1475863357546766339

Demand for risky assets has been waning as the year comes to a close, in part as the Federal Reserve starts pulling back on the stimulus.

There’s talk of “a leveraged unwind in Bitcoin longs going into year-end,” said Ben Emons, global macro strategist with Medley Global Advisors, adding that “could be a damper on risk sentiment for a very brief period.”

Based on the Fibonacci retracement, the next level of support for Bitcoin is around $44,200. Many still see the slow action over the holiday period of thin liquidity exacerbating the price moves.

“While spot prices have been trading in a relatively tight range (before the dip today), vols have been telling an interesting story,” noted QCP Capital, Asia-based digital asset traders.

According to QCP Capital, the potential reasons for the spike in volatility and the getting sold down even harder include realized vol underperforming and market rolling short-vol carry positions ahead of the massive year-end expiry on Friday.

A total of 129,800 options contracts worth over $6 billion are expiring this Friday. Bitcoin tends to move toward the “max pain” point in the lead-up to expiration, and for this options expiration, this point is $48k.

Moreover, market makers are getting increasingly long altcoin volatility, but with the absence of volatility markets for these native tokens, “market makers are forced to sell vol in BTC and ETH instead as a proxy.”

“Our position into the new year is net long gamma, short vega (in BTC and ETH), and long wings (far strikes),” stated QCP Capital. “We haven’t really seen that massive short squeeze that we’ve been expecting, but perhaps the calendar turn would produce some fireworks in thin markets.”

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