The reduction in Federal Reserve liquidity is currently in progress, with a decrease of approximately $200 billion since the beginning of the week.
This decline is primarily a result of increased corporate tax payments flowing into the Treasury General Account, accompanied by a probable uptick in Reverse Repo utilization towards month-end.
We are now halfway through this liquidity tightening period, which is anticipated to extend for another seven trading days.
An additional $100 billion to $300 billion of liquidity may be withdrawn before October 1. Nevertheless, despite this tightening scenario, major risk assets like US stock indices, gold, and Bitcoin [BTC] have experienced a surge, bolstered by the Federal Reserve’s recent 50 basis point interest rate cut.
While Bitcoin markets have largely remained resilient in the face of the short-term liquidity crunch, a sense of caution is advised until this period of liquidity stress subsides.
Will Bitcoin be able to sustain its rally despite the decrease in Federal Reserve liquidity?
Over $2 Billion in Bitcoin Futures Contracts Initiated
Despite the liquidity decrease, multiple indicators suggest that Bitcoin may sustain its upward momentum. One such indicator is the notable rise in open interest concerning futures contracts.
Within just 48 hours, over $2 billion in Bitcoin futures contracts were initiated. Although this sharp surge could potentially trigger a long squeeze, it also signifies trader optimism regarding Bitcoin’s future price potential.
The Federal Reserve’s interest rate cut appears to have alleviated concerns about liquidity, thereby prompting traders to speculate on Bitcoin attaining higher price levels.
Another positive indicator arises from the Coinbase Premium index, which gauges the price differentiation between Bitcoin on Coinbase and Binance.
Presently, the Coinbase Premium exhibits a negative value, indicating that Bitcoin is priced lower on Coinbase compared to Binance. This divergence pattern typically denotes robust buying pressure, especially on Binance.
When two correlated metrics diverge, it frequently signals a reversal, suggesting that Bitcoin might have reached a price bottom following its recent downward trend.
Despite Bitcoin’s price stability, the existing buying pressure hints at a potential price surge in the offing.
Crucial Levels and Liquidation Zones for the Next Development
For traders, identifying liquidation levels is critical as they serve to pinpoint areas where price movement might trigger liquidity absorption. Currently, the key liquidity level for Bitcoin stands at $65,000.
A breach above this level could likely direct Bitcoin towards $75,000, where substantial liquidity is poised.
A move beyond $65,000 would not only steer Bitcoin closer to this subsequent target but also validate a bullish market structure, signifying a higher high subsequent to the recent higher low observed post Bitcoin’s price decline in August.
Despite the ongoing Federal Reserve liquidity squeeze, Bitcoin has exhibited resilience, with multiple indicators hinting at a continued upward trend.
The rise in open interest, strong buying momentum on Binance, and crucial liquidity thresholds collectively point towards a potential price uptick for Bitcoin in the upcoming weeks.
Traders should monitor the $65,000 level closely, as a breakthrough at this point might signify a significant upward thrust towards $75,000. However, prudence remains imperative until the liquidity stress phase fully dissipates.