Overheated gold and record leverage: Bitcoin on the brink of correction
Markets are sending alarming signals. Gold, traditionally considered a safe-haven asset, has turned into a speculative instrument, and leveraged trading volume in the US has reached historic highs. These factors create a fragile environment for risk assets, including Bitcoin (BTC).
Analysis of the current situation points to markets being overloaded with bullish bets, while safe-haven assets are losing their footing. Any shift in sentiment could trigger a chain reaction capable of affecting cryptocurrencies as well.
Gold: From Safe Haven to Speculation
Data shows that gold likely peaked early this year. After a correction of approximately 30% from its highs, the precious metal may find support around $4,000 per ounce, but the overall picture appears overheated.
For the first time since 2007, gold's 180-day volatility is trading at a premium of roughly 2.3 times relative to the volatility of the S&P 500 index. This has turned the precious metal into a risk asset. The last time such a situation occurred, it preceded the Great Recession, exposing the stock market's excessively low volatility.
When gold reached its price peak around $5,500 in February, it was at a forty-year high relative to its 60-month moving average. At the same time, most central banks had already shifted to raising interest rates.
The rise in yields on 30-year US Treasury bonds to nearly 5.2% in May — the highest since 2007 — creates headwinds for non-yielding assets. In such an environment, gold risks being in a losing position compared to stocks.
Record Leverage: A Ticking Time Bomb
Data on leveraged speculation in US markets adds to the alarming backdrop. Assets under management of US leveraged and inverse ETFs have reached a record $208 billion. Considering double and triple leverage, the real volume of positions exceeds $460 billion. Since the beginning of April, it has grown by approximately $200 billion.
The lion's share comes from triple-leveraged funds ($320 billion), followed by double-leveraged funds ($171 billion). Positioning has become extremely one-sided: inverse funds, which profit from market declines, account for only $27 billion. For comparison, during the 2022 bear market, the total exposure of such funds was only a fraction of current levels. The leverage embedded in US markets has never been this extreme.
What Does This Mean for Bitcoin?
Both studies lead to the same conclusion: markets are overloaded with bullish bets to the limit, and gold, once a familiar safe haven, has itself turned into a speculative asset.
For Bitcoin, the signal is twofold. On one hand, if overheated markets with record leverage reverse downward, Bitcoin as a risk asset could be caught in a wave of forced selling alongside stocks. On the other hand, if faith in gold as a safe haven falters, some capital will sooner or later begin seeking a new refuge, and then Bitcoin could capture that demand.
My professional opinion: the current market configuration resembles the situation before a significant correction. Investors should exercise caution and be prepared for increased volatility. Bitcoin, for all its appeal as an alternative asset, is not immune to systemic risks emanating from traditional markets.