Bitcoin Rally Hinges on Spot Buying, Wintermute Warns of Short-Term Risks

Bitcoin has made a significant surge above $80,000, but Wintermute, an algorithmic trading firm, is cautious about the rally's sustainability. According to Wintermute, the recent rise in prices can be attributed largely to short squeezes triggered by the liquidation of short positions in derivatives markets.

The quality of demand is a key factor in determining the rally's health. Bitcoin broke above $80,000 for the first time since January, but Wintermute notes that prices in this zone are highly fragile. The firm points out that spot trading volume has fallen to its lowest level in 2 years, while Bitcoin futures open interest rose by about $10 billion over the past month.

Wintermute also highlighted that perpetual futures funding rates remain below normal levels, indicating a chance of another round of forced liquidations. This suggests that short covering driven by liquidations should be distinguished from conviction buying to actually hold spot Bitcoin. The firm notes that without spot-led demand, this rally could reverse sharply.

However, there are some positive signals for Bitcoin's medium-to-long-term trend. A total of $623 million has recently flowed into spot Bitcoin exchange-traded funds, with Morgan Stanley's spot Bitcoin ETF drawing $194 million in its first month. Additionally, Bitcoin held on cryptocurrency exchanges has fallen to its lowest level in 7 years.