Although the Bitcoin (BTC), daily price chart appears to be in a steady recovery, some worrying indicators are coming out of derivatives markets. The futures and options markets show a lack confidence from Bitcoin pro traders at the moment. However, there is a positive spin in the data.
Coinbase, USD Bitcoin Price Source: TradingView
It seems impossible to predict the road to $40,000, which is why cryptocurrency traders often call it “manipulation”, when price fluctuations occur.
Be careful if you use #bitcoin in that area. One picture is worth a thousand words, and mine does the job. It’s a matter of time before it is too late for #btc. This weekend is weekly close & monthly close as well so expect volatility and manipulation.#Crypto pic.twitter.com/kPhDKAjupQ
— @Maze (Will Never DM 1st Follow) (@_CryptoMaze_ January 28, 2022
Investors should study derivatives markets to see how arbitrage desks, whales and market makers are placed, regardless of what the reason behind Bitcoin’s price recovery.
Retail traders prefer the perpetual contract (inverse Swaps) but pro traders tend to choose fixed-calendar options and futures. These derivatives are more difficult to trade but offer more complex strategies.
We are now past liquidations, but we still have the path to $69,000
Data indicates that there hasn’t been any relevant futures contract liquidation in the past 23 days. Leverage long (buyers) having their positions terminated accelerates the price correction because derivatives exchanges must sell futures at market prices.
Total crypto futures liquidations, USD. Source: Coinglass
You can see that the $290 million mark was used to terminate a long on Jan. 23. This partly explains why Bitcoin’s recent recovery has been relatively calm. Despite this, the market is not far from being overvalued, as BTC trades at 44% below its $69,000 high.
Annualized premium for Bitcoin 3-month futures. Source: Laevitas.ch
To compensate traders who “lock in” the money for the two- to three month period leading up to the contract expiry, the annualized Bitcoin futures premium should be between 5% and 12%. Low levels below 5% indicate extreme bearishness, and high numbers above 12% are bullish.
The chart above shows that this indicator fell below 5% Jan. 21 but has not shown any signs of confidence from professional traders.
The big question is, “Is the glass half empty?” If Bitcoin crosses the $42,000 resistance, traders may be caught off guard. There will be additional buying activity, because nobody wants to be left behind.
Futures trading on Bitcoin are neutral. Options traders, however, are skeptical
It’s difficult at the moment to see a market direction. However, the 25% delta skew indicates that arbitrage desks or market makers overcharge for downside protection.
The skew indicator will rise above 10% if traders are worried about a Bitcoin price crash. Generalized excitement, on the other hand, reflects a negative 10% Skew.
Bitcoin 30-day options 25% delta-skew: Source: Laevitas.ch
We’ve been at 10% for nearly a week, despite the 18% BTC price rebound since the $33,000 low. Pro traders still price higher chances of a market crash, according to the options skew data.
These arbitrage desks and market-makers will have to reverse their bearish positions once Bitcoin prices break $42,000, despite the negative indicator from Bitcoin options. The data is positive, however, as it shows that the futures premium didn’t show any signs of panic even though the market fell 52% from its all-time high.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.