Key Bitcoin options ‘fear’ indicator reflects traders’ regulatory concerns

Bitcoin (BTC), after 46 consecutive trading days above $42,000, began to fall on Sept. 21. The 13% cumulative loss over the past three days was sufficient to erase hard-earned gains since Aug. 6. Historical data also shows that it took 79 days for the bearish cycle to recover the $42,000 level.

Traders focused their attention on the U.S. Federal Reserves meeting to discuss the monetary policy. The financial authority will likely announce whether it will reduce the $120 billion monthly asset purchase stimulus program. Curiously, Chinas equity market, measured by the iShares MSCI ChinaETF ($MCHI), recovered 1% as all of this took place.

Is China the real root of the recent correction?

Investors began to wonder if cryptocurrency regulation was playing a part in the current bearish situation, given the apparent disconnect between Bitcoins performance versus the slight recovery of global markets.

Today, U.S Securities and Commission (SEC), Chair Gary Gensler spoke with the Washington Post. He called stablecoins instruments suitable for use at “casino gaming table” during the interview.

Groan. It seems like the US regulatory clampdown against crypto, which has been in full swing for six months, is only going to get more uglier by each week. Although we arent sure how it will impact the markets, there isnt much to cheer about regarding rn.
— Grant Gulovsen, Esq. (@gulovsen September 19, 2021

Grant Gulovsen, an attorney, noted that the regulations looming shadow is likely to have a bearish effect on the market in the short-term. Investors hate uncertainty about what products and services are allowed.

Coinbase: Bitcoin price in USD Source: TradingView

You can see how the $42,000 threshold was critical in determining when the mini-bear cycles ended. This was evident from Elon Musks comments on Bitcoin mining energy usage on May 12.

Investors should be aware of the 25% delta skew which compares similar call and put options side-by side to accurately measure the professional traders pricing of the possibility for a further price collapse. This will be positive if the premium for protective put options is greater than comparable risk-call options.

A skew indicator that oscillates between -7% to +7% is generally considered neutral. However, if the downside protection is more expensive, the metric shifts beyond this range, it is usually a “fear” indicator.

Deribit Bitcoin options 25% delta skew. Source: Laevitas

Bitcoin options traders have remained neutral since July 25, when the indicator fell below the 7% threshold. The recent price action caused short-term options traders to go into “fear” mode when the metric reached 9.

Related: U.S. Treasury Dept sanctions Crypto OTC broker Suex in connection with alleged involvement in facilitation of transactions for ransomware attack

Options markets confirm investor lack of conviction

One should also examine the perpetual futures markets to exclude externalities that are specific to this option instrument.

Perpetual futures prices are not like regular monthly contracts. They are almost identical to regular spot exchange prices. Retail traders will find their lives much easier with this feature. They no longer have to manually roll over or calculate futures premiums.

To balance the exposure of the exchange, the funding rate is charged to longs (buyers) when they demand more leverage. If the situation changes and shorts (sellers), are more leveraged, the funding rate becomes negative and they pay the fee.

Bitcoin 8-hour USDT/USD margin Futures Funding Rate Source: Bybt

The chart below shows that Bitcoins funding rates have been shifting to the negative, even though they are not sustainable or useful. A 0.05% rate is charged every 8 hours, which is equivalent to 1% per Week. This shouldnt be enough to force any derivatives trader into closing their position.

Options markets data supports the fear indicator derived from the positive 25% delta option skew. The recent regulatory issues have likely led to a lack in conviction among buyers of derivatives markets. Coinbases decision to stop offering crypto lending programs was the latest victim of regulatory pressure.

Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.