This week saw heightened volatility across crypto and traditional markets, with Bitcoin briefly dipping below $100,000 before recovering, while Ethereum showed resilience as traders rotated capital. The broader macro backdrop remained uncertain, with a risk-off sentiment in equities following AI-related disruptions and continued focus on monetary policy.
Macroeconomic Overview:
Bitcoin initially struggled as risk assets tumbled following China’s DeepSeek AI launch, which sent shockwaves through equity markets, particularly the tech sector. The Nasdaq Composite dropped 3.1%, and Nvidia saw an unprecedented 17% single-day loss, wiping out $589 billion in market cap. Despite this, Bitcoin remained relatively stable, trading above $101,000, reinforcing its status as a macro asset with increasing institutional demand.
While the Trump administration’s early days fueled speculation about a potential Strategic Bitcoin Reserve, the lack of concrete policy announcements kept the market hesitant. Trump’s initial focus has been on tariffs and economic protectionism, leaving digital asset initiatives on the backburner. As a result, Bitcoin’s upside momentum stalled, with risk reversals skewed toward calls only from March onwards.
Meanwhile, all eyes were on the Fed’s rate decision, where interest rates were held steady as expected. Fed Funds Futures now imply only an 18% probability of a 25 bps rate cut in March, with traders recalibrating expectations for later in 2025.
Crypto Market Dynamics:
Bitcoin dipped below $100,000 early in the week as liquidation pressures mounted but found support near $101,000. It later rebounded to $104,700 by the week’s close, supported by a moderate recovery in equities and renewed institutional demand.
Ethereum outperformed Bitcoin, with capital rotating into ETH and other altcoins. The ETH/BTC ratio climbed to 0.0318, reflecting traders’ shift toward higher beta plays. ETH is now trading at $3,250, with implied volatility holding steady in the low 60s.
Notable Market Developments:
● MicroStrategy’s Expansion: The company added another 10,000 BTC to its reserves, bringing total holdings to 471,107 BTC.
Institutional Bitcoin Adoption: The Czech National Bank is exploring adding Bitcoin to its reserves, joining other global financial institutions in considering BTC as a macro asset.
● Regulatory Headlines: The SEC acknowledged Canary Capital’s Litecoin ETF application, signaling potential for more altcoin ETFs in the future.
● Ethereum ETF Optimism: ETH saw a boost after the SEC approved Bitwise’s filing for a dual Bitcoin-Ethereum ETF.
Flows and Market Activity:
Paradigm flows showed a mix of short-term uncertainty and longer-term optimism, with positioning shifting accordingly.
● Call spreads were heavily traded, with notable 31-Jan-25 105k/110k/115k butterflies sold, reflecting near-term uncertainty.
● A large 850-lot 28-Mar-25 130k call sale suggests some traders are taking profits or hedging against extended upside.
● Put buying at the 31-Jan-25 100k strike reflects some caution, particularly ahead of key macro events.
● ETH flows leaned bullish, with 28-Feb-25 3800/5500 call calendar spreads bought in size.
● 31-Jan-25 2900/3300 bear risk reversals were lifted, suggesting traders are balancing downside risk while positioning for a potential rally.
Volatility in Bitcoin front-end contracts trended lower, with BTC basis hovering around 10% annualized, signaling more neutral sentiment. ETH term structures remained slightly more bid, with the front end sitting around 62v and backs near 72v.
Outlook:
Looking ahead, crypto markets will be driven by both macroeconomic and regulatory developments.
● Fed & Economic Data: The December PCE report is the next key macro event, with expectations of 2.6% headline and 2.8% core inflation.
● Regulatory Clarity: The potential for a U.S. Bitcoin Strategic Reserve remains an open question, but without concrete action, BTC’s upside may remain capped in the near term.
● Altcoin Rotation: With BTC dominance steady at 59%, capital rotation into Ethereum and other alts remains a key theme, especially given ETF optimism and structural tailwinds.
About Author
Chris Newhouse, aka @CryptoDeFiGuy, is a tutor of @coincall_global and a seasoned crypto trader turned director at Cumberland.
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