Bitcoin (BTC), which has fallen below $45,000 over 14 days, is currently 40% lower than the $69,000 all time high. This is a similar movement to September 2021 when Bitcoin prices were flatlined for 11 consecutive days. It was 36% lower than the April 14th high of $64,900.
Coinbase, USD Bitcoin Price Source: TradingView
The Bitcoin futures premium, also called “basis”, is a way for traders to determine whether the current price momentum mirrors September. These fixed-calendar options do not have funding rates, which means that their prices will be different from regular spot exchanges.
A trader can determine the bullishness of the market by measuring the gap in expense between futures and regular spot markets. The three-month futures contract will trade at a 15% annualized premium (basis) if buyers are too optimistic.
Premium in September 2021 for Bitcoin 3-month futures contracts Source: laevitas.ch
The basis rate was ranging from 9% to 13% in September earlier, which indicates confidence. However, on Sept. 29, just before Bitcoin reached $45,000, the 3-month futures price premium was at 6.5%. A reading below 5% is usually considered bearish. So, a reading of 6.5% in September was a sign that investors had low confidence.
Bitcoin 3-month futures premium. Source: laevitas.ch
The current market conditions are very similar to September 2021, when Bitcoin was just $45,000 and triggered a 62% rally. The current Bitcoin 3-month futures premium is 6.5%. Recently, the indicator ranged from 9.9% to 11.1%. This indicates mild optimism.
Investors don’t expect unexpected positive market movements, and this is exactly what is happening right now. You can also check options markets to confirm that this move was unique to the instrument. The 25% delta skew is a comparison of equivalent call (buy) or put (sell). Because the protective put options premium exceeds the call options, the indicator will turn positive if “fear” is present.
Related: What bear markets? Analyst says that the current BTC price dip is still in line with previous Bitcoin cycles.
When market makers are bullish, the opposite is true. The 25% delta skew will shift to the negative. Normally, readings between negative 8 and positive 8 are considered neutral.
Deribit Bitcoin options 25% delta skew in Sept. 2021. Source: laevitas.ch
By late September 2021, the 25% delta skew was close to 10%, which indicates distress from options traders. Arbitrage desks and market makers were charging too much for protective put (bearish), positions.
Deribit Bitcoin options 25% delta skew. Source: laevitas.ch
Options traders are neutral according to the current 25% delta-skew indicator. On Jan. 10, however, the metric crossed the 8% threshold, signaling mild bearishness.
The current market conditions look like late September, when Bitcoin reversed its 24-day downtrend and launched a 62% rally over the next three weeks.
This phenomenon could be repeated? The Bitcoin bulls are certain to hope so.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.