Bitcoin could rise to $40,000 amid global economic turmoil

Despite stagnant prices, a 24.2% gain since Oct. 7 has boosted confidence, driven by the upcoming impact of the 2024 halving and the potential approval of a spot bitcoin exchange-traded fund (ETF) in the United States.

Investors worried about gloomy outlook for global economy

Bears expect that as the Fed keeps interest rates above 5.25% to curb inflation, more macroeconomic data will support a global economic contraction. For example, on November 6, China's exports fell 6.4% year-on-year in October. In addition, Germany's industrial production in October, released on November 7, fell 1.4% from the previous month.

Despite the possibility of supply cuts from major oil producers, weak global economic activity caused WTI oil prices to fall below $78 for the first time since late July. Comments by Minneapolis Fed President Neel Kashkari on November 6 set the bearish tone, triggering a "flight to quality" reaction.

“We haven’t completely solved the inflation problem,” Kashkari said. “We have more work to do.”

Investors have sought refuge in US Treasuries, sending the 10-year yield to 4.55%, its lowest level in six weeks. Curiously, the S&P 500 has reached 4,383, its highest level in nearly seven weeks, exceeding expectations amid a global economic slowdown.

This phenomenon can be attributed to the fact that companies in the S&P 500 hold a total of $2.6 trillion in cash and equivalents, providing some protection in the face of high interest rates. Despite the growing exposure of major technology companies, the stock market offers scarcity and dividend yield, which is in line with investor preferences during uncertain times.

Meanwhile, Bitcoin futures open interest hit its highest level since April 2022 at $16.3 billion. The milestone becomes even more significant as the CME solidifies its position as the second-largest Bitcoin derivatives market.

Healthy Demand for Bitcoin Options and Futures

The use of Bitcoin futures and options has been making headlines lately. Investors see two most bullish catalysts in 2024 that could drive demand for leverage: the potential for a spot BTC ETF and the Bitcoin halving.

One way to gauge the health of the market is to examine the Bitcoin futures premium, which measures the difference between the two-month futures contract and the current spot price. In a strong market, the annualized premium (also known as the basis rate) should generally be in the 5%–10% range.

Bitcoin 2-month futures annualized premium (basis). Source: Laevitas

Note how the indicator is at 11%, the highest level in more than a year. This suggests that strong demand for Bitcoin futures is driven primarily by leveraged long positions. If the opposite were the case, with investors betting heavily on a fall in the price of Bitcoin, the premium would remain at 5% or less.

Another piece of evidence can be drawn from the Bitcoin options market, comparing the demand between call (buy) and put (sell) options. While this analysis does not include more complex strategies, it provides a broad context for understanding investor sentiment.

Deribit BTC options put and call 24h volume ratio. Source: Laevitas

Over the past week, the indicator has averaged 0.60, reflecting a 40% preference for bullish (buy) options. Interestingly, Bitcoin options open interest has grown 51% over the past 30 days to $15.6 billion, and this growth has also been driven by bullish instruments, as shown in the put options volume data.

With Bitcoin’s price reaching its highest level in 18 months, some degree of skepticism and hedging may be in the works. However, current conditions in the derivatives market show healthy growth with no signs of excessive optimism, consistent with a bullish outlook that targets prices of $40,000 and higher by the end of the year.