Bitcoin's Derivatives Data Points to Price Volatility Ahead
  The latest moves in crypto markets, in context January 18, 2022 Sponsored by  If you were forwarded this newsletter and would like to receive it, sign up here.
Good morning, and welcome to First Mover. Here's what's happening this morning:
The CoinDesk TV show "First Mover," hosted by Christine Lee, Emily Parker and Lawrence Lewitinn, is on hiatus and will return on Tuesday. Today's newsletter was edited by Omkar Godbole.
Market Moves Bitcoin, ether and most alternative cryptocurrencies were lower on Tuesday, appearing to trade in sync with traditional markets as futures contracts tied to the tech-heavy Nasdaq stock index dipped 1%.
The U.S. two-year Treasury yield rose to an 11-month high of 1.05%, taking the month-to-date gain to 30 basis points, or 0.3 percentage point. The rising yield suggests that bond traders are preparing for aggressive interest rate hikes by the Federal Reserve.
Futures traders betting on the Federal Reserve rate are already pricing in three hikes this year. Several Fed officials and Wall Street banks have recently said the central bank might even deliver four quarterly hikes in a bid to control inflation that has climbed to its highest clip in nearly four decades. Historically, monetary-policy tightening has been bearish for cryptocurrencies and asset prices in general.
Quicker and faster rate hikes ahead?
The popular narrative says that the Fed won't do anything that would destabilize markets even if it means high inflation. That may have been true at one point but may not be the case anymore – partly because of the emergence of cryptocurrencies as alternatives to fiat, or government-issued, money.
Consistently high inflation dents confidence in fiat currencies, forcing people to look for alternatives with store of value appeal like bitcoin.
In other words, if inflation runs hot, the already growing popularity and adoption of cryptocurrencies as a payments alternative could explode. Bitcoin and several other cryptocurrencies have already found acceptance in countries facing high inflation.
It's no surprise; the International Monetary Fund recently urged the Fed to speed up policy tightening amid mounting inflation fears.
So, the possibility of central banks resorting to aggressive rate hikes cannot be ruled out. In the days before cryptocurrencies, there was little to no competition to fiat currencies such as the dollar, and central banks had plenty room to tolerate high inflation – without the constant reminder of currency debasement. (Bitcoin's supply is fixed by the underlying blockchain code, and other major cryptocurrencies including ether (ETH) have introduced anti-inflationary mechanisms.)
In essence, the growing popularity of cryptocurrencies may force central banks to do the right thing, i.e. – prioritize inflation control.
Derivatives data points to volatility ahead
Day traders bored of bitcoin's recent slumber may soon have to remain glued to their screens, as a large number of open futures positions signal renewed price turbulence ahead.
"Futures markets remain a powder keg for short-term volatility with Perpetual Futures Open Interest at ~250,000 BTC – a historically elevated level," blockchain analytics firm Glassnode said in a research note published on Monday.
An above-250,000 BTC open interest has coincided with volatility spikes in the past. "Since April 2021, this has paired with large pivots in price action as the risk for a short or long squeeze increases, resolved in a market wide deleveraging events," Glassnode wrote.  Charting showing elevated bitcoin futures open interest (Source: Glassnode) Open interest refers to the number of contracts traded but not liquidated with an offsetting position.
Abnormally high open interest indicates excess leverage – funds borrowed to amplify returns from the trade. In such situations, the market becomes vulnerable to liquidations and resulting price turbulence. Liquidations refer to the forced closure of long or short positions by exchanges due to margin shortage. These lead to exaggerated price moves, as seen several times over the past 12 months.
Read: Bitcoin May Soon Wake From Slumber, Derivatives Data Indicate
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Disclaimer: The information presented in this message is intended as a news item that provides a brief summary of various events and developments that affect, or that might in the future affect, the value of one or more of the cryptocurrencies described above. The information contained in this message, and any information liked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. The information presented herein is accurate only as of its date, and it was not prepared by a research analyst or other investment professional. You should seek additional information regarding the merits and risks of investing in any cryptocurrency before deciding to purchase or sell any such instruments.
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