For the past two months, Bitcoin had been performing poorly compared to other altcoins. However, this trend was reversed when (BTC)’s 20% rally drove its market capitalization above $1 trillion on Oct. 6. This shifted investors’ attention to the top cryptocurrency and altcoins are currently in red.
If Bitcoin traders are overconfident and use leverage to open long positions, the current positive momentum can be dangerous. This risk can be avoided by traders analyzing derivatives markets carefully to avoid it.
Weekly performance of the top 14 coins Source: CoinMarketCap
You can see above that the altcoin market cap increased by 5.8%, while Bitcoin experienced a 20% gain during the same period. There were exceptions, like Shiba Inu’s (SHIB), which rose by 2000%, Fantom’s (FTM), which rallied 60% and Klaytn(KLAY), which gained 36%. The aggregate market capitalization of altcoins was not as strong as Bitcoin’s.
Bill Miller, a billionaire Wall Street investor, recently expressed his optimism about Bitcoin and raised concerns about most altcoin projects. Miller specifically mentioned that “big banks” would be involved in Bitcoin and also referred to the “huge amounts of venture capital money flowing into Bitcoin.
The macro-economic situation seems to have fueled the recent Bitcoin frenzy. To pay its obligations, the United States increased its debt limit to $480 billion. Long-term commodities rallies have been fueled by the inflationary pressure caused by interminable stimulus packages and low interest rates.
Oil reached its highest level for seven years and wheat futures hit a record high that was not seen since February 2013. The annualized S&P Case-Shiller home prices index has seen a 23.3% increase.
For a better understanding of why Bitcoin traders get too excited, traders can analyze Bitcoin’s derivatives indicators such as the futures market premium and options skew.
Futures premium shows that traders are slightly bullish
The basis rate is the difference between the current spot market level and longer-term futures contracts. This indicator is often referred to as “the futures premium”.
Annualized Bitcoin 3-month Futures. Source: Laevitas.ch
In healthy markets, a 5% to 15% annualized increase in premium is expected. This is known as contango. Sellers are able to demand more money in order to delay settlement.
The indicator reached the upper limit of the neutral zone after the recent 20% Bitcoin price rally. This indicates that investors are bullish, but not too confident. As seen in mid May, buyers can demand excessive leverage and the basis rate easily exceeds 25%.
Option markets can be used to exclude externalities that are not specific to futures instruments.
Options for Bitcoin signal “neutral” sentiment
The 25% delta skew is a comparison of similar call (buy) or put (sell). This metric will turn negative if “fear” is present because traders anticipate potential downside.
Bullish option traders will be bullish and cause the 25% delta skew indicator shift to the negative. Normally, readings between negative 8 and positive 8 are considered neutral.
Deribit BTC options 25% delta skew. Source: Laevitas
The chart above shows that options traders have not been overconfident in six months. This would indicate “greed” since the 25% delta skew fell below negative 8.8. The indicator has been hovering around 0 over the past week, indicating that there are balanced risks between bulls and bears.
These findings are not indicative of a lack in confidence among buyers. In fact, it’s quite the contrary. If Bitcoin bulls had been already overconfident at $57,000, there would have been little room for leverage. This could increase the likelihood of a cascading liquidity event.
Bulls are cautiously optimistic and even a 20% price adjustment is unlikely to change the situation. The futures market’s base rate has a reasonable premium after the rally.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.