Bitcoin (BTC), has a long history informing local tops when market events are predicted. The most recent launch of the Bitcoin exchange-traded funds (ETF), on Oct. 19, was no exception. It led to a 53% monthly rally that reached an all-time high of $67,000.
Investors are trying to determine if the 10% correction is a short-term profit taking move or the end of the bull market. For this to be determined, traders will need to look at BTC’s past price activity in order to identify any similarities.
Bitcoin price in USD Source: TradingView
The chart below shows the day that a New York Times headline announced that Bitcoin received a cautious nod from China’s central bank in November 2013. Yi Gang, the People’s Bank of China’s deputy governor, stated that anyone could participate in Bitcoin’s markets. He also mentioned his personal perspective that suggested a positive long-term view on digital currency.
It is also important to mention that the favorable media coverage of Chinese state-run TV aired Oct. 28 and featured Vancouver’s first Bitcoin ATM.
You can also anticipate bearish events
There have been bearish trends throughout Bitcoin’s 12-year history. The April 2014 Chinese ban was an example of a 5-month-old price bottom.
Bitcoin price in USD Source: TradingView
Huobi and BTC Trade were two of China’s most important exchanges. They announced that their accounts with certain domestic banks would be shut down within one week. Rumours had circulated since March 2014 and were fueled by a Caixin note.
Recent events include the CBOE Bitcoin futures launch Dec. 19, 2017, which was one day before the $20,000 all-time record. A Coinbase IPO on Nasdaq was another event that marked a local high. It saw the Bitcoin price reach $64,900. The following chart shows both events:
Bitcoin price on Coinbase in USD Source: TradingView
You can see that all the events mentioned were widely anticipated, even though not all had an exact announcement date. The Oct. 19th trading session of Bitcoin’s futures-based ETF was preceded by Gary Gensler, the Chair of SEC, announcing on Aug. 3, that the regulator would accept a BTC ETF application using CME derivatives.
Investors could have placed themselves before the ProShares Blockchain Strategy ETF launch. A look at BTC’s derivatives market might provide additional insight.
The futures premium wasn’t exaggerated
The basis rate, or futures premium, is a measure of the difference in prices between futures contract prices, and regular spot market prices. The preferred instrument of arbitrage desks and whales is the quarterly futures. Retail traders might find it difficult due to the settlement date and price difference with spot markets. However, their greatest advantage is their lack of fluctuating funding rates.
Analysts have pointed out the “return to the contango” following the 17% bais rate, which was the highest in five months.
Dylan LeClair (@DylanLeClair_ October 20, 2021
Normal futures markets (soys, S&P 500 and WTIl) trade at slightly higher prices than the regular spot market. This is because the investor must wait for the contract to expire before he receives his payout. There’s also an opportunity cost, which causes the premium.
Annualized premium for Bitcoin 3-month futures. Source: laevitas.ch
Let’s say one arbitrages trades in order to maximize USD funds. The trader could purchase a stablecoin to get a 12% annualized return using either decentralized finance (DeFi), or centralized crypto lending. Market makers should consider a 12% premium in the Bitcoin futures markets to be a neutral rate.
The basis rate was below 17% despite a 50% month-to-date rally, excluding the 20% short-lived peak on Oct. 21. The futures premium jumped to 49% on the eve Coinbase’s stock launch. People who consider the current scenario to be too optimistic are wrong.
Liquidation risk was also not imminent
A 10% to 15% price fall could cause cascading liquidations if buyers become too confident and are willing to pay a high premium for leverage via futures contracts. A 40% annualized premium or more does not necessarily mean an imminent crash risk. Buyers can still add margin to their positions.
The main derivatives metric showed that a 10% decline from Oct. 20’s $67,000 high was not enough for professional traders to worry. Instead, the basis rate was at a healthy 12 percent.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.