China bans Bitcoin (BTC), again.
We are not going back in time. The People’s Bank of China (PBoC), published a new set of steps to encourage inter-departmental coordination in cracking down crypto activity. These measures were intended to “cut off payment channels and dispose of relevant websites, mobile applications, and in accordance with law.”
Investors may have missed the expiry of the $1.5 billion Ether (ETH), and $3 billion BTC monthly options that expired less than an hour before the crypto ban news was published. According to Molly, a former contributor to Bitcoin Magazine, the comments from China were first posted on Sept.
If an entity wanted to profit from the negative swing in prices, it would make more sense to release the news on Friday before the expiry at 8:20 UTC. The $42,000 protective put option was rendered worthless by Deribit’s expiry price of $44,873. The option holder was entitled to sell Bitcoin at $42,000 but that is null if BTC expiry occurs above that price.
The Chicago Mercantile Exchange’s (CME) Bitcoin futures expiry price is the average price between 2:00 and 3:00 UTC. The potential $340 million in open interest settled at $42,150. Futures markets are highly competitive. Sellers (longs) match buyers at all times. This makes it nearly impossible to predict which side has more firepower.
Bitstamp Bitcoin Price in USD Source: TradingView
Even with the $4,000 price swing, total liquidations of leveraged long futures contracts accounted for less than $120million. Bears should find this data alarming because it indicates that bulls don’t seem overconfident or that they aren’t using excessive leverage.
Although some doubt was expressed by pro traders, they remained neutral
The futures premium, also called “basis rate”, can be used to determine whether professional traders are bullish or bearish.
This indicator measures the difference in longer-term futures contracts to current spot market levels. In healthy markets, a 5% to 15% annualized Premium is expected. This is known as contango.
This price gap is caused when sellers demand more money to hold settlement for longer. A red alert appears whenever this indicator turns negative or fades, also known as “backwardation.”
Basis rate for 3-month Bitcoin future contracts. Source: Laevitas.ch
The annualized futures premium fell sharply on Sept. 24, due to the negative 9% movement. This was the second consecutive month of its lowest level. The current 6% indicator is at the bottom end of the neutral range, which ends a moderate bullish period that lasted up to Sept. 19.
Analyzing options markets can help confirm that the movement was not specific to that instrument.
Option markets confirm that traders are entering the “fear zone”.
The 25% delta skew is a comparison of similar call (buy) or put (sell). If “fear” is present, the metric will be positive as the protective put option premium is greater than other risk options.
When market makers are bullish, the opposite is true. The 25% delta skew indicator will shift to the negative zone. Normally, readings between negative 8 and positive 8 are considered neutral.
Deribit Bitcoin options 25% delta skew. Source: laevitas.ch
Although the 25% delta skew was in the neutral zone since July 24, it spiked to 10% September 22, signaling “fear” by options traders. Today’s Bitcoin price action caused the indicator to climb above 11% after a brief retest at the neutral 8% level. This level was last seen 2 months ago and is very similar to the BTC futures markets.
Professional traders shifted to fear mode today, even though there were no bearish signs in the Bitcoin derivatives market. This is because futures traders are reluctant opening leverage long positions while option markets offer premiums for protective put options.
Bears could profit from the current panic of investors if Bitcoin does not show strength over the weekend.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.