Arthur Hayes, the founder of BitMEX, in his latest essay, presents a worrying prediction for the bitcoin market in March, anticipating a severe 30-40% correction. Your detailed analysisBased on a deep understanding of market dynamics, it describes the complexities and driving factors behind this expected decline, respectively a healthy but deep correction.
Hayes begins his speech with a warning about the nascent state of the cryptocurrency bull market, warning enthusiasts not to get too carried away. “The cryptocurrency bull market is in its early stages and we should not get carried away with our enthusiasm,” he says, highlighting the uncertain path towards the inevitable collapse of the fiat financial system.
Why bitcoin Price Could Fall 40% in March
His prediction revolves around three key events and financial indicators that will converge in March. Hayes first points to the expected drop in the Reverse Repo Program (RRP) balance to a critical level of $200 billion, a scenario that he believes will cause market anxiety about future sources of dollar liquidity. He describes this threshold as a moment of reckoning: “When this number approaches zero… the market will wonder what's next,” underscoring the severity of this anticipated development.
The second fundamental factor is the fate of the Bank Term Financing Program (BTFP), which will expire on March 12. Hayes describes this as a major test for the financial system, speculating on the US Treasury's decision-making process in the face of potential liquidity crises among banks. He articulates the market's anticipatory stance, suggesting that “the market will start to be curious many weeks in advance about whether banks will continue to receive this lifeline.”
The final piece in Hayes' forecast is the Federal Reserve meeting on March 20, where a rate cut is expected. This decision, in Hayes' opinion, is crucial to setting market expectations and influencing the dynamics surrounding the provision of dollar liquidity by the Federal Reserve and the US Treasury Department.
Hayes then delves into his tactical trading strategy in response to these events, detailing his plans to short the cryptocurrency market using bitcoin put options. He articulates his approach by saying, “I will be looking to purchase a sizable put option position on bitcoin around this time,” indicating his readiness to take advantage of the anticipated shift in the market.
An important aspect of Hayes' analysis is the potential impact of US-listed bitcoin exchange-traded funds (ETFs). She maintains that the anticipation of significant fiat capital inflows into these spot ETFs could initially drive the price of bitcoin to dizzying highs. However, she warns that this rally could be followed by a dramatic correction, exacerbated by a liquidity squeeze.
“Imagine if the anticipation of hundreds of billions of fiat money flowing into these ETFs at some future date drove bitcoin above $60,000,” he says, illustrating the potential for a sharp decline. Hayes explains that a market already strengthened by ETF speculation would be particularly vulnerable to a sharp correction, which could worsen the slowdown to 30-40% in the event of a liquidity crisis.
How will Hayes negotiate with this scenario?
Hayes then goes on to discuss his tactical trading decisions in response to these indicators. He shares his plan to initially short the cryptocurrency market using bitcoin put options, followed by selling back US Treasury bills and acquiring more bitcoin and cryptocurrencies. Explaining his approach, Hayes states: “I will be looking to purchase a sizable put option position on bitcoin at this time,” indicating his willingness to capitalize on the expected market decline.
Additionally, Hayes details his strategy for bitcoin puts, explaining the rationale behind choosing puts expiring on June 28 and his approach to selecting the strike price. He highlights the importance of timing and market dynamics, noting: “I expect bitcoin to see a healthy correction (…) from whatever level it reached in early March.”
In his conclusion, Hayes contemplates several scenarios that could play out differently than his predictions. He considers the implications of a slower decline in the PVP, a possible extension of the BTFP by Yellen, or alternative outcomes from the Federal Reserve's March meeting. He notes that each of these scenarios could lead to different market behaviors, which would require adjustments to his trading approach.
At the time of publication, btc was trading at $43,940.
Featured Image from YouTube/What Did bitcoin Do, Chart from TradingView.com
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