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After enduring a prolonged drought of positive developments for more than a year, the cryptocurrency market received a much-needed boost last week with the introduction of spot bitcoin ETF filings by prominent financial firms such as BlackRock, Invesco, and WisdomTree.
Despite the encouraging response from crypto traders, resulting in a notable surge of over 20% in the value of bitcoin (BTC) over the past eight days, it would be wise for them to remain cautious as certain traditional market indicators suggest a possible inclination towards risk aversion in the near future.
One important takeaway from the past three years is that digital assets cannot stay detached from traditional finance (TradFi) for an extended period. Whenever there is a significant decline in stocks and other risky assets, it tends to disrupt the sentiment in the cryptocurrency market. To gauge the current situation, it is useful to examine the Cboe Volatility Index (VIX), commonly referred to as Wall Street's "fear gauge," along with its associated futures contracts.
The disparity between the costliest VIX futures contract and the actual index has expanded to levels that have traditionally indicated significant peaks in the S&P 500, a key gauge for global risk assets, including cryptocurrencies.
"We are seeing a really high spread now, which is a sign of a top for prices," Tom McClellan, a technical analyst and editor of The McClellan Market Report, tweeted Thursday.
The spread between the VIX futures contract with the highest price and the VIX index has reached extremes. (McClellan)
The reading above 60%, indicating that the VIX has dropped significantly below the futures contracts, implies a high level of optimism among stock traders, which is often associated with market tops. A comparable reading was observed in early January 2022, shortly before stocks started to decline from their all-time highs.
The indicator also drew the attention of trader and analyst James Choi, who has maintained a positive outlook on bitcoin and technology stocks since January.
Choi suggests that the recent widening of junk bond spreads, coupled with declines in traditional inflation hedges such as gold and silver, point to an impending deflationary bust, which poses a significant risk-off event.
Choi is expecting a major risk-off event. (James Choi)
The term "junk bond spread" refers to the variance between the yields of high-risk, high-return bonds and the comparatively safer U.S. Treasuries. When the spread widens, it signifies that investors are seeking a greater premium to invest in riskier debt.
Both Choi and Sven Henrich, the founder and chief market strategist at NorthmanTrader, agree that the system is experiencing a depletion of U.S. dollar liquidity. This development has a negative impact on bitcoin, as it is greatly affected by fluctuations in fiat liquidity, as well as other high-risk assets.
Bitcoin experienced a surge in value alongside stocks earlier this year due to improved liquidity conditions resulting from the U.S. Treasury's utilization of its cash balance after the government reached the debt limit.
At the time of writing, the dominant cryptocurrency in terms of market value was being traded at $30,070, as indicated by CoinCryptoUs data.
