Will Bitcoin see a sell-off after reaching a new high?

Written by MiyaHedge, Crypto Kol Translated by Zhouzhou, BlockBeats

Editor's note: This article discusses Bitcoin's price fluctuations during the election, pointing out that Bitcoin's price is closely related to Trump's chances of winning. The short-term rise is overestimated, and the actual rise has already occurred. Bitcoin's value as an inflation hedge asset will gradually become apparent, and it is believed that the price will not change much after Trump's victory, and the final long-term rise of Bitcoin will occur in 2025/2026.

The following is the original content (the original content has been reorganized for easier reading and understanding):

A series of analysis of today's election results

First, we start with the analysis of the odds in the betting market that currently dominates Bitcoin's price trend. FYI: At the time of this post (14:02 UTC), Trump's odds of winning are 61.7%, while the Bitcoin price is $70,047.38.

BTC Price Action vs. Trump's Odds

I will first compare BTC price action vs. Trump's odds, assuming that the price movements of Bitcoin over the past few weeks were based entirely on Trump's odds of winning. Next, I will divide these price movements into four different phases.

Oct. 5 - Oct. 12: The Emergence of Opportunities

During this week, the mindset of market participants began to change:

Trump’s chances of winning (slowly rising to over 50% in betting markets) were not zero. In fact, the election looked closer than expected (especially after Biden’s retirement). The initial impact of this realization was that market participants began to hedge their expectations of a Harris win or reassess previous biases.

By comparing the two baskets, GSP24DEM and GSP24REP, it is clear that after the debate between Harris and Trump, the market was too complacent about Harris's victory.

Not only did the market show complacency about the results, it also seriously misjudged the possibility of Trump's victory. With almost no attention paid to the election in August and September, the market was close to fully pricing in a Harris victory.

Thus, the following situation emerged:

1. More than 75% of people believed that Harris had a very high probability of winning

2. Almost no one paid attention to hedging Trump's victory, and everyone focused on hedging index risk

3. The betting market began to suddenly tilt towards Trump

Another noteworthy thing happened in the traditional financial market at that time, which can help better understand the speed of sentiment change at that time. In the first stage (October 5th - October 12th), the demand for hedging at the index level was very high. What this means is: Everyone thinks that a market index (e.g. S&P 500, NASDAQ) could fall significantly. [Remember Iran, etc? ]

So investors buy index hedges to protect themselves from a big "explosive" shock. However, every time there is a lot of index hedges without an actual risk, the "pain trade" tends to go in the opposite direction. So the market starts to move up. The worst-case conflict (e.g. Iran vs. Israel) doesn't happen, and market sentiment calms down.

(See the image, returns after short-term hedges are often extreme).

The "Fear, Uncertainty and Doubt (FUD)" in the Middle East is not irrelevant, even though Crypto Twitter (CT) seems to have wrongly downplayed its impact. During this week, the premium of index hedges reached an unprecedented high, and investors' nervousness made them focus almost all their attention on the downside risk of the index and pay little attention to the "yet to come" election.

This reversal of sentiment did not occur when oil prices peaked in early October (see image: Oil Price Pressure), but in late October. The Trump/election trade began when investors were preoccupied with index risk (see Bitcoin's strong performance on October 10), not recently.

The above is to help readers understand the theme of the period from October 5th to October 12th, why everyone paid insufficient attention to this trade, why the "Trump Trade" became such an important dominant theme, and why there were no buyers to take over the profit-taking.

In summary: The exponential risk brought by the situation in the Middle East provided a good buying opportunity for funds that dared to challenge the panic, and the "Trump Trade" began. The complacency about Harris' victory began to reverse, and the market's focus shifted to FUD in the Middle East.

So, here’s what happened: Trump-sensitive stocks had the most hated rally, driven by “nobody owns right-tail risk” and mean reversion to Trump. Bitcoin was slow to react to this sentiment change, and we were one of the last assets to follow the change, along with Trump media (kind of like MEME stocks), rising as the probability of a Trump win increased (the actual stock basket adjusted faster, with most Republican stocks having adjusted by early October.) Mean reversion is happening.

Bitcoin has shown strength since the last pullback on October 10th, as market participants realized that the election trade had begun and the entire market was now in a “risk-on” state.

Oct 12 - Oct 30: The Rally

During this 18 day window, the amount of Bitcoin accumulated was insane just waiting for the election results. The rally was basically one way up, shorts were teased, and pullbacks were completely eaten up. ETF inflows hit new highs. It was just an insanely bullish environment.

But why was it like this? Saylor forward trade? Not really, there was almost no volatility from the MSTR announcement It was all due to election trading, nothing more. There was no other factor (like interest rates or inflation) that provided this rally signal to buyers, except for the rising probability of Trump's victory.

During those days, the market rose almost every day, and geopolitical risks and Nasdaq weakness were completely ignored (e.g. the divergence between Nasdaq and Bitcoin on Oct 15). The entire market is represented by a big green candle. All of this is closely related to Trump's chances of winning the election. Trump-sensitive stocks are bought in large quantities, and Bitcoin has also risen accordingly.

We have been chasing prices, and open interest (OI) has continued to increase. Even though the lead of perpetual contracts is very large, Bitcoin has continued to rise without a sharp pullback, even though the Nasdaq has performed weakly. For example, on October 17, the price around 67K remained stable for a while, and then the spot market followed up slightly, but there was no sharp pullback. This shows that there is not only short-term leverage liquidation demand in the market, but also actual demand is supporting the rise. This also suggests that this wave of rise is event-driven and investors want to enter the market at this time. Around October 14, the market shifted from “We didn’t properly consider the probability of Trump’s victory” to “Trump seems to be winning, and now we have to hurry up to chase the rise.” That week, the performance of the macro market showed a clear correlation with the Trump transaction, especially the nuclear power and commercial real estate sectors, which rose along with Bitcoin-sensitive stocks. Obviously, this wave of rise was not accidental, but the result of Trump’s transaction. The real core of this market occurred that week, and any subsequent rise was just speculative funds betting on short-term results.

After several days of continuous gains, a turning point finally occurred. October 30 - November 4: During the reversal trading, the price of Bitcoin was highly correlated with the probability of Trump's victory. For the first time since October 10, the market did not absorb the pullback as easily as before. Although the price hit a new high and technical factors (such as the improvement of open interest OI) did not change much, the market became hesitant.

This hesitation is due to the decline in the probability of Trump's victory, rather than the so-called "electoral risk relief". For example, the S&P 500 and Nasdaq 100 rose 1% and 1.2% respectively, but it was not the removal of election risk behind this, but the decline in Trump's chances of winning that led to the sharp sell-off. This correlation would have been unthinkable a few months ago, and the current supply in the hands of market participants holding election bets is so large that it completely dominates price action.

Why didn't Trump's victory - if it is so important to Bitcoin price action now - push Bitcoin above 80k? Every tiny price fluctuation is currently correlated with Trump's chances of winning, but why wouldn't Trump's victory directly drive Bitcoin up?

Who will be the next buyers and why? Who will come out after Trump wins and say, “Yes, now is a good time to buy a lot of Bitcoin”? Of course there will be people buying, but will these people be able to outpace the investors who have been accumulating Bitcoin for more than a month and are ready to take profits once the bet works out? The answer is no.

We may see the whole rally pull back after Trump wins. So what are the short-term incentives for people to buy Bitcoin at this stage? Will Trump announce a sovereign Bitcoin fund on Inauguration Day? No. What policies need to change? The United States is already moving in a Bitcoin-friendly direction. How many times did Trump mention Bitcoin or cryptocurrencies on the campaign trail, especially compared to issues like immigration? No.

So not much will change in the short term, people are now facing a window of more than 2 months (until Trump officially takes office on January 20th), and after that, it may take a long time to see real changes.

Traders don't bet on something that might happen at least 2 months from now, and buying Bitcoin now is not a bet on the Trump presidency, but a bet on the outcome of the upcoming election. A 40% chance of Harris winning makes it less attractive to be long Bitcoin now because you are still facing a large short-term supply sell-off. If the assumed reward for going long is a 60% chance of winning $4 and a 40% chance of losing $10, then going long is not very attractive from a risk/reward perspective. Therefore, many people forget that the market for this election is more like a "mowing field" full of short-term funds.

Summary of my Bitcoin price predictions: Trump wins: Initial excitement, may rush to all-time highs, but no support around 70k, then fall back, smart holders will buy Bitcoin with the logic of inflation hedge assets. Harris wins: 1 month of "early bets" on Trump's victory failed, there was a big sell-off, more smart holders will buy supply, and the price slowly rises back to all-time highs as an inflation hedge asset.

I don't think the outcome of this election is important, I am bullish on Bitcoin as an inflation hedge, but the short-term upward volatility is overestimated, and the core part of the market has already happened.