Bitcoin Prepares for $125K: Discover the Reasons

Bitcoin flirted with $121.000 on Thursday, its highest level in seven weeks. The bulls' optimistic stance remains undiminished, especially given the current conditions, which are much stronger than in August when BTC briefly touched $124.000. The recent period has also contributed to the easing of recession fears and gold's upward momentum, with insights from Bitcoin derivatives suggesting that traders are being caught off guard, often creating conditions for a short squeeze.

While gold has hovered around $3.400 for the past two months, Bitcoin has risen ahead of a period of escalating global trade conflicts. The temporary reduction in US tariffs on China, which expired on August 12, fueled expectations of rising inflationary pressure.

Inflation risks have subsided; gold supports Bitcoin

The latest US Personal Consumption Expenditures Price Index, released on Friday, showed a 2,9% increase in August, in line with analyst expectations. With inflation no longer considered a pressing concern, traders are optimistic that the US Federal Reserve (Fed) will maintain its course of further rate cuts. Traders who bought Bitcoin above $120.000 in August were left disappointed, as import tariffs appeared unlikely to negatively impact the US trade balance or retail sales, at least in the short term. Bitcoin's October surge coincides with a 16% increase in gold prices in six weeks, while data from the World Gold Council points to continued accumulation by central banks.

According to the CME FedWatch tool, the implied probability that the US Federal Reserve will have lowered the interest rate to 3,50% or lower by January 2024 is now 40%, compared to 18% in mid-August. Investors welcome the current inflationary trend, but continued weakness in the labor market could put pressure on the S&P 500's recent peak, especially given the uncertainty surrounding a potential US government shutdown.

Fed Vice Chairman Philip Jefferson expressed concern about the labor market on Monday, warning that it "could experience stress" if no support is provided. He indicated that the impact of President Trump's trade, immigration, and other policies is contributing to this, and that these effects "will become clearer in the coming months," forcing traders to seek alternative hedging instruments.

In the three days leading up to Bitcoin's record high in August, traders were pricing in the odds of price increases and decreases equally. Today, the same BTC options indicator indicates moderate correction fears, with put (sell) options trading at a premium to call (buy) options. Over $313 million in leveraged short (sell) Bitcoin futures positions were liquidated between Wednesday and Thursday, confirming that the surge above $120.000 caught markets by surprise, reducing the likelihood of significant profit-taking in the futures markets if this bullish momentum continues.

Another factor mitigating short-term risks was OpenAI's successful share sale, which reached a record valuation of $500 billion. The artificial intelligence sector faced heightened scrutiny following US export restrictions on advanced AI chips to China and Meta's decision to freeze hiring in its AI division.

With investors increasingly confident about impending interest rate cuts in the US and seeing less risk of a stock market correction, Bitcoin's path to $125.000 and beyond seems increasingly plausible. Meanwhile, gold's steady rise underscores traders' growing preference for alternatives within traditional bond and equity markets.

Frequently Asked Questions

What does gold's rise mean for Bitcoin?
Gold's rise points to growing investor interest in alternatives, potentially boosting demand for Bitcoin, especially if inflation concerns correlate with the cryptocurrency's value.

Why were short positions liquidated?
The liquidation of over $313 million in short positions comes amid a sudden surge in Bitcoin prices, which caught many traders by surprise and forced them to sell to cut losses.

What role does the Fed play in current market dynamics?
The Fed's expected rate cuts are crucial for market dynamics, as lower interest rates increase the attractiveness of non-interest-bearing assets like Bitcoin while also boosting liquidity in the market.