Bitcoin (BTC), which briefly touched $39,650 on Monday, saw a 42.6% drop from its all-time high of Nov 22, 2022. Some believe that a “crypto Winter” has already begun, citing $2.1 billion worth of leverage-long crypto futures contracts that were canceled in the last seven days.
Price of Bitcoin/USD at FTX Source: TradingView
According to the descending channel that has been guiding Bitcoin’s decline over the past 63-days, traders should expect prices below $40,000 by February.
Investor confidence continued to fall after the December FOMC session of the United States Federal Reserve on Jan. 5. The monetary policy authority expressed its commitment to reduce its balance sheet and increase interest rate in 2022.
The markets were further pressured by the political turmoil in Kazakhstan on Jan. 5. Protests in the country caused Internet access to be shut down. This led to Bitcoin’s network hashrate plummeting 13.4%.
Futures traders remain neutral
The futures premium, also known as “basis rate”, is a way to determine whether professional traders are bullish or bearish.
This indicator measures the difference in market levels and longer-term futures contracts. Healthy markets will see a 5% to 15% annualized increase in premium, which is known as contango.
This price gap is caused when sellers demand more money to hold settlement longer. A red alert is issued whenever the indicator turns negative or fades, which is known as “backwardation.”
Basis rate for 3-month Bitcoin future contracts. Source: Laevitas.ch
You can see that the futures premium has not traded below 7% in the last few months. This indicator is excellent considering the lack of Bitcoin price strength over this period.
Options traders aren’t as bullish as they used to be
Analyzing the options markets is also necessary to exclude externalities that are specific to futures instruments.
The 25% delta skew is a comparison of similar call (buy) or put (sell). This metric will be positive when there is fear because the premium for protective put options is higher than similar risk options.
When greed is the dominant mood, the 25% delta-skew indicator will shift to the negative.
Deribit Bitcoin options 25% delta skew. Source: laevitas.ch
Negative 8% to positive 8% readings are generally considered neutral. December 6, 2022 was the last time that the 25% delta skew indicator reached the 10% range of “fear”
Related: Bitcoin drops below $40K in the first 3 months, fear sets to ‘accelerate’
Options market traders are currently at 8%, which is a very low indicator of neutral-to-bearish sentiment. Protective put options are becoming more expensive so arbitrage desks and market markers don’t believe $39,650 is the bottom.
The sentiment is generally pessimistic. $2.1 billion of aggregate futures contract liquidations indicate that derivatives traders’ longs, or buyers, are rapidly losing confidence. Although it is difficult to predict the bottom, there is no indication that pro traders will provide strong support.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.