Markets have a saying that “Don’t fight with the trend”, and other variations of this phrase include “never catch the falling knife” and “don’t fight against the trend”. The bottom line is that traders shouldn’t try to predict trend reversals or, even worse, attempt to increase their average price while losing more money.
It doesn’t really matter if you trade soy futures or stocks, or cryptocurrency. Markets move in cycles that can last from a few days up to several years. The chart below shows that Bitcoin (BTC), is a case where it’s difficult for anyone to support a bullish position.
Coinbase: Bitcoin price in USD Source: TradingView
Every attempt to break down the descending channel over the past 25 days has been abruptly stopped. Curiously, the trend points towards sub-$40,000 by mid October, which is the deadline for the U.S. Securities and Exchange Commission decision regarding the ProShares Bitcoin Exchange Fund (Oct. 18), and Invesco Bitcoin Exchange Fund (Oct. 19, respectively).
The CoinShares weekly report shows that institutional investors were prompted by recent price action to enter the sixth consecutive week with inflows. Between Sept. 20-23, there were nearly $100 million inflows.
Expert traders believe that Bitcoin must regain the $43,600 support in order for the bullish trend’s return. On-chain data indicates that there has been a lot of accumulation due to the declining exchange supply.
Perpetual futures traders are neutral to bearish
Perpetual contracts are the preferred instrument of retail traders and one way to gauge investor sentiment is to analyze their funding rate. Inverse swaps, which are perpetual futures, trade at a price that is very similar to regular spot exchanges.
When longs (buyers), demand more leverage, the funding rate is automatically added to their account every eight hours. If the situation is reversed and shorts (sellers), are excessively leveraged, the funding rate becomes negative and they pay the fee.
Bitcoin perpetual futures 8 hour funding rate Source: Bybt.com
The neutral situation is where leverage longs pay a small fee. This oscillating between 0% and 0.03% every 8-hour period is equivalent to 0.6% per weekly. The above chart shows a slight bearish trend from Sept. 13, when funding rates were last above the threshold of 0.03%.
Although bulls are favored by the put-to-call ratio, this trend has changed.
Options are not like futures contracts. They can be divided into two parts. Optional call (buy) options enable the buyer to purchase Bitcoin at a fixed price upon expiry. These options can be used for either bullish or neutral arbitrage trades.
As protection against negative price swings, put (or sell) options are often used.
You can compare these calls and openly explore the options to understand how they are balanced.
Bitcoin options allow interest put-to-call ratio. Source: Laevitas.ch
On Aug. 29, the indicator hit a 0.47 low, reflecting the 50,000 BTC protective put stacked against the 104k BTC buy (call) options. The gap is still decreasing, however, as neutral-to-bearish puts contracts began to gain traction following the Sept. 24th monthly expiry.
Bitcoin options and futures markets might suggest that it is premature to call this a bearish period. However, the derivatives indicators have shown no bullish signs in the past two weeks. The ETF deadline acts as a trigger for breaking the current market structure, and it seems that bulls still have hope.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.