Long Bitcoin With Tight Stop Loss in Place, Matrixport Says

Crypto services provider Matrixport, which has more than $3 billion in assets under management, has turned cautiously bullish on bitcoin (BTC) after the largest cryptocurrency by market value's August slide, preferring to buy the recent price dip with a tight stop loss.

Bitcoin fell over 10% on Aug. 15, testing the former resistance-turned-support level at $25,000. Since then, prices have been trading around $26,000, with many traders anticipating continued losses in the coming weeks.

Matrixport's head of research and strategy, Markus Thielen, suggests otherwise.

"With tight stop losses, we would be long bitcoin, expecting lower treasury yields and a rally in U.S. tech stocks," Thielen said in Tuesday's market update. "We expected a 10% correction by the end of the summer, which we have gotten, and with the appropriate risk management approach, traders can try to be long again."

According to Thielen, traders should closely monitor bitcoin's price for a potential drop below $25,800, as that would trigger the stop loss on the long position. As of writing, bitcoin was changing hands at $26,000, down about 11% this month.

A stop loss is a buy or sell order placed in advance to limit losses stemming from prices moving against the trade.

The yield on the U.S. 10-year Treasury note has dropped 18 basis points to 4.18% in the past seven days, offering a bear breather to risk assets, including cryptocurrencies.

That's because investors seek returns from high-risk alternatives like technology stocks and cryptocurrencies when yields drop. Conversely, when yields rise they feel encouraged to rotate money out of risky investments and into fixed-income securities. Yields surged early this month to the highest levels since 2009.

According to Thielen, yields could continue to weaken as the U.S. inflation rate cools.

"The U.S. macro backdrop continues to be highly favorable to risk assets, as we pointed out in December 2022. Inflation will continue to fall and the Fed appears to be on hold for the time being, that’s what Fed Chair Powell implied last week, in our view," Thielen said.

"The Fed’s fastest rate hike cycle in 50 years will likely set up a multiyear deflationary boom and we expect new all-time U.S. stock market highs by the end of this year," he added.

Market makers create order book liquidity and are always on the opposite side of investors. They make money from the bid-ask spread, maintaining a market-neutral portfolio by constantly buying and selling the underlying asset.

According to Thielen, market makers will likely buy bitcoin to maintain a direction-neutral book should bitcoin start rallying. That, in turn, could accelerate price gains.

"Derivatives data shows a huge call ‘wall’ between 30k to 35k, and once a tiny rally gets going, the option gamma could cause a violent rally back to 30k as market makers will have to buy bitcoin to hedge themselves. Not a short squeeze, but it does not take much to get a rally going," Thielen said.

UPDATE (Aug. 29, 08:48 UTC): Adds perspective, analysis starting at Treasury yields drop subhead.