Does Bitcoin price risk losing $28K with BTC futures premium at 2-month lows?

May 8, 2023 Coin Telegraph

Does Bitcoin price risk losing K with BTC futures premium at 2-month lows?

Professional Bitcoin traders are favoring sideways price action as BTC futures premium drops and the options delta skew nears 0%

For the past 17 days, Bitcoin (BTC) price has been trading within a narrow 8.5% range from $27,250 to $29,550, causing the 40-day volatility metric to drop below 40%. This wasn't restricted to cryptocurrencies as the S&P500 index's historical volatility has reached 17%, its lowest level since December 2021.

But will $28,000 become the new resistance? Not according to the latest Bitcoin futures and options data. Nevertheless, macroeconomic conditions remain the main driver for risk markets’ price fluctuations in the near to medium terms.

BTC price flattens as investors lose risk appetite

A myriad of reasons could be given to explain the relatively low price oscillations in risk markets, including the expectation of a recession, investors unwilling to place new bets until the U.S. Federal Reserve ends its rate hikes, or increased demand (and focus) on fixed income trades.

The problem is that no one can prove what has been causing investors to restrict their risk appetite and drive Bitcoin’s price sideways. Many fear that commercial real estate is a growing concern, which could trigger major turbulence ahead—including Warren Buffett, the multi-billionaire fund manager.

While some believe that the U.S. debt ceiling discussion and the banking crisis could further cement the U.S. dollar’s weakening, Buffett does not foresee alternatives. The finance mogul is a long-term critic of the precious metal gold, as his investment thesis prioritizes yield-providing assets.

The debt ceiling drama has caused Treasury Secretary Janet Yellen to warn that a "steep economic downturn" would follow if Congress fails to act in the next few weeks.

On the one hand, the government is facing pressure to sustain economic activity and contain the banking crisis. Ultimately, increasing the debt limit will add liquidity to the markets, further triggering inflation.

This complex environment of inflation risks, an economic downturn, and a weakening U.S. dollar might have caused investors to lose interest in risk assets and concentrate their bets on fixed income trades as interest rates have moved above 5% per year.

For Bitcoin, an alarming sign would be a negative futures contract premium or increased costs for hedging using options. That’s why investors should closely track those BTC derivatives metrics.

Bitcoin futures display weak demand from longs

Bitcoin quarterly futures are popular among whales and arbitrage desks. However, these fixed-month contracts typically trade at a slight premium to spot markets, indicating that sellers are asking for more money to delay settlement.

As a result, BTC futures contracts in healthy markets should trade at a 5-to-10% annualized premium — a situation known as contango, which is not unique to crypto markets.

*Bitcoin 2-month futures annualized premium. Source: Laevitas.ch*

Bitcoin traders have been extremely cautious in the past two weeks. Even during the recent rally toward $29,850 on May 6, there has been no surge in demand for leverage longs. Moreover, the subsequent 6.8% correction down to $27,800 has brought the BTC futures premium to its lowest level in two months at 1.5%.

Bitcoin options risk metric stood neutral

Traders should also analyze options markets to understand whether the recent correction has caused investors to become more optimistic. The 25% delta skew is a telling sign when arbitrage desks and market makers overcharge for upside or downside protection.

In short, if traders anticipate a Bitcoin price drop, the skew metric will rise above 7%, and phases of excitement tend to have a negative 7% skew.

*Bitcoin 30-day options 25% delta skew: Source: Laevitas*

As displayed above, the options delta 25% skew has recently flirted with excessive optimism, as on May 7 the protective put options were trading at a 7% discount relative to similar neutral-to-bullish call options.

Still, the trend quickly reverted as the Bitcoin price tested levels below $28,000. Currently, this is a balanced risk appetite according to BTC options pricing, as the 25% delta skew indicator stands near 0%.

Bitcoin options and futures markets suggest that pro traders are less confident, favoring sideways trading. Thus, traders should not flip bearish due to weakening derivatives indicators.

In other words, if there was enough conviction that $28,000 would become resistance, one would expect a much higher appetite for risk-averse put options and a negative BTC futures premium, or "backwardation."

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

Bitcoin futures premium falls to lowest level in a year, triggering traders’ alerts

March 13, 2023 Coin Telegraph

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On March 12, Bitcoin futures traded 5.5% below regular spot exchanges, causing volatility in derivatives markets.

The price of Bitcoin (BTC) increased by 14.4% between March 12-13 after it was confirmed that financial regulators had rescued depositors in the failing Silicon Valley Bank (SVB). The intraday high of $24,610 may not have lasted long, but $24,000 represents a 45% increase year-to-date.

On March 12, U.S. Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, and Federal Deposit Insurance Corporation (FDIC) Chair Martin Gruenberg issued a joint statement to reassure SVB depositors.

Regulators also announced a systemic risk exception for Signature Bank (SBNY), an intervention designed to compensate depositors for losses incurred by the previous management. Signature Bank was one of the most prominent financial institutions serving the cryptocurrency industry, alongside Silvergate Bank, which announced its voluntary liquidation last week.

To avert a larger crisis, the Fed and Treasury devised an emergency program to supplement all deposits at Signature Bank and Silicon Valley Bank with funds from the Fed's emergency lending authority. According to the regulators' joint statement, "no losses will be borne by the taxpayer," although the strategy for deploying Treasury assets is questionable.

The stablecoin USD Coin (USDC) also caused significant turmoil in the cryptocurrency industry after breaking below its 1:1 peg with the U.S. dollar on March 10. The fear grew after the issuing management company Circle confirmed that $3.3 billion in reserves were held at Silicon Valley Bank.

Such an unusual movement caused price distortion across exchanges, prompting Binance and Coinbase to disable the automatic conversion of the USDC stablecoin. The decoupling from $1 bottomed near $0.87 in the early hours of March 11 and was restored to $0.98 after FDIC's successful intervention in SVB was confirmed.

Let's take a look at Bitcoin derivatives metrics to see where professional traders stand in the current market.

Bitcoin futures metrics flipped to extreme fear

Bitcoin quarterly futures are popular among whales and arbitrage desks. These fixed-month contracts typically trade at a slight premium to spot markets, indicating that sellers are asking for more money to delay settlement for a longer period.

As a result, futures contracts in healthy markets should trade at a 5% to 10% annualized premium — a situation known as contango, which is not unique to crypto markets.

*Bitcoin 3-month futures annualized premium. Source: Laevitas.ch*

The chart shows traders had been neutral-to-bearish until March 10 as the basis indicator oscillated between 2.5% and 5%. However, the situation quickly changed in the early hours of March 11 as the stablecoin USDC decoupled, and cryptocurrency exchanges were forced to change their conversion mechanisms.

Consequently, the Bitcoin 3-month futures premium turned into a discount, otherwise known as backwardation. Such movement is highly unusual and reflects investors' lack of trust in intermediaries or extreme pessimism towards the underlying asset. Even as the USDC stablecoin price approaches $0.995, the current 0% premium indicates a lack of leverage buying demand for Bitcoin via futures instruments.

Crypto-fiat gateways are key to reclaiming improved market dynamics

By reclaiming the $24,000 support, Bitcoin has restored levels unseen since the Silvergate Bank stock price collapse on March 1 after the delayed filings of its annual 10-K financial report. Moreover, crypto exchanges and stablecoin providers were forced to suspend U.S. dollar deposits, with the closure of Signature Bank affecting OKCoin.

Banking options for crypto firms, including exchanges, are likely to become more limited as traditional banks remain wary of the sector. According to some analysts, U.S. regulators are purposefully discouraging major banks from doing business with cryptocurrency exchanges.

Fiat gateway on and off ramps are critical for stablecoins, market markers, and cryptocurrency exchanges for a variety of reasons. The ability to convert Bitcoin to cash and vice versa is critical for their day-to-day operations, so the longer it takes to find new banking partners, the more difficult it is for stablecoins to allow redemptions and exchanges in order to maintain a high level of liquidity.

Derivatives metrics may have recovered from the initial banking crisis contagion risk, but they still indicate Bitcoin bulls' lack of confidence in a long-term recovery.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Crypto derivatives data signals improving investor sentiment and a possible trend reversal

February 6, 2022 Coin Telegraph

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Money is trickling back into the crypto market and derivatives data suggests that investor confidence is improving as the market forms a bottom.

This week the total crypto market capitalization rallied 10% to $1.68 trillion, which is a 25% recovery from the Jan. 24 bottom. It's too early to suggest that the market has found a bottom but two key indicators — The Tether/CNY premium and CME futures basis — have recently flipped bullish, signaling that positive investor sentiment is backing the current price recovery.

*Total crypto market cap excluding stablecoins, in USD billion. Source: TradingView*

Traders should not assume that the bear trend has ended by merely looking at price charts. For example, between Dec. 13 and Dec. 27, the sector's total market capitalization bounced from a $1.9 trillion low to $2.33 trillion. Yet, the 22.9% recovery was completely erased within nine days as crypto markets tanked on Jan. 5.

Bearish data suggests the Fed has less room for rate hikes

Even with the current trend change, bears have reason to believe that the 3-month long descending channel formation has not been broken. For example, the Feb.4 rally could have reflected the recent negative macroeconomic data, including EuroZone retail sales 2% yearly growth in December, which was well below the 5.1% market expectation.

Independent market analyst Lyn Alden recently suggested that the United States Federal Reserve could postpone interest rate hikes after disappointing U.S. employment data was released on Feb. 2. The ADP Research Institute also showed a contraction of 301,000 private-sector jobs in December, which is the worst figure since March 2020.

Regardless of the reason for Bitcoin (BTC) and Ether (ETH) gaining 10% on Friday, the Tether (USDT) premium at OKX reached its highest level in four months. The indicator compares China-based peer-to-peer (P2P) trades and the official U.S. dollar currency.

*Peer-to-peer CNY/USDT vs. CNY/USD. Source: OKX*

Excessive cryptocurrency demand tends to pressure the indicator above fair value, or 100%. On the other hand, bearish markets tend to flood Tether's market, causing a 4% or higher discount. Therefore, Friday's pump had a significant impact on China-driven crypto markets.

CME futures traders are no longer bearish

To further prove that the crypto market structure has improved, traders should analyze the CME's Bitcoin futures contracts premium. The metric compares longer-term futures contracts and the traditional spot market price.

It is an alarming red flag whenever that indicator fades or turns negative (backwardation) because it indicates that bearish sentiment is present.

These fixed-calendar contracts usually trade at a slight premium, indicating that sellers are requesting more money to withhold settlement for longer. As a result, the 1-month futures should trade at a 0.5% to 1% annualized premium in healthy markets, a situation known as contango.

*BTC CME 1-month forward contract premium vs. Coinbase/USD. Source: TradingView*

The chart above shows how the indicator entered backwardation levels on Jan. 4 as Bitcoin moved below $46,000 and Friday's move marks the first sentiment trend reversal in a month.

Data shows that institutional traders remain below the "neutral" threshold as measured by the futures' basis, but at least reject the bearish market structure formation.

While the CNY/Tether premium might have shown a trend shift, the CME premium reminds us that there's a lot of distrust in Bitcoin's capacity to function as an inflationary hedge. Still, the lack of CME traders' excitement could be exactly what BTC needs to further fuel the rally if the $42,000 resistance is broken over the weekend.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

2 key Bitcoin price metrics suggest BTC is primed to reclaim $40,000

January 31, 2022 Coin Telegraph

2 key Bitcoin price metrics suggest BTC is primed to reclaim ,000

Apple

Data suggests $34,000 was the bottom and BTC’s recent performance could be a sign that traders are beginning to open fresh longs.

Cryptocurrencies had a volatile week after Bitcoin's (BTC) sudden crash to $33,000 on Jan. 24. However, the sharp 9% drop fully recovered within 8 hours after BTC price regained the $36,000 support.

On Jan. 26, Bitcoin rallied to $38,960 but it could not sustain the level and corrected by 8.8% in the following 8 hours. When factoring in the recent ups and downs, Bitcoin managed to only gain a meager 1.6% over the past seven days.

Even with the considerable price swings, the aggregate futures contracts liquidations were relatively low. Longs (buyers) had $570 million futures terminated, while shorts (sellers) faced $690 million. Data shows that Bitcoin futures represented 41% of the total $1.25 billion liquidations.

Regulatory winds could be limiting BTC’s price recovery

The total crypto market capitalization presented a modest 1.6% weekly increase, in line with Bitcoin's performance.

*Total crypto market capitalization, USD billion. Source: TradingView*

Notice how the Jan. 24 price is forming higher lows and currently shows support at $1.75 trillion. Even with the price being 22% down in 2022, the total crypto market capitalization showed a healthy 12.5% bounce since the Jan. 24 low.

Investors seem to be digesting this week's regulatory news where United States Congressman Ted Budd submitted an amendment to scrub a bill provision allowing the U.S. Treasury to unilaterally prohibit certain financial transactions without public input.

If passed in its current form, the America COMPETES Act of 2022 would result in a significant blow to the cryptocurrency industry, as Coin Center's executive director Jerry Brito stated.

Investors were negatively impacted by news that the U.S. White House is reportedly preparing an executive order on crypto to make government agencies conduct risk analysis on cryptocurrency as a national security threat.

Metaverse tokens decoupled after last week’s Apple news

Steady bearish newsflow might have been the cause for cryptocurrencies’ recent price action but there were some stellar performances from Metaverse tokens.

*Top weekly winners and losers on Jan. 31. Source: Nomics*

Apple (AAPL) CEO, Tim Cook, said in an investors' call on Jan. 27 that metaverse applications have a lot of potential and that his company is investing in augmented reality developments on its devices.

The news was enough to catapult metaverse-related tokens by up to 36%, including Flow, The Sandbox (SAND), Decentraland (MANA), Enjin Coin (ENJ), and Arweare (AR).

On the other hand, Terra (LUNA) was impacted after the Avalanche-based reserve currency Wonderland Money (TIME) announced that a pending proposal would determine whether the project closes up shop or not. As a result, the MIM stablecoin dipped below 1.00 and some speculate that this may have had a knock-on effect on Terra's LUNA and UST token.

Scalability and interoperability blockchain solutions Cosmos (ATOM), Fantom (FTM), and Harmony (ONE) presented negative performances after the Ethereum hash rate surpassed 1.11 PH/s, its highest level ever registered. A higher hash rate indicates that more miners are joining the network, which helps to cement blockchain security.

Tether premium and CME futures showed improvement

The OKEx Tether (USDT) premium measures the difference between China-based peer-to-peer (P2P) trades and the official U.S. dollar. Figures above 100% indicate excessive demand for cryptocurrency investing. On the other hand, a 5% discount usually indicates heavy selling activity.

*OKEx USDT peer-to-peer premium vs. USD. Source: OKX*

The Tether indicator continued to display strength as it stood above 99% over the past seven days. That is in stark contrast to three weeks ago when panic selling from China-based traders drove the indicator to a 4% discount.

To confirm that the crypto market structure has improved, traders should analyze the CME's Bitcoin futures contracts premium. This metric analyzes the difference between longer-term futures contracts to the current spot price in regular markets.

Whenever this indicator fades or turns negative (backwardation), it suggests that there is bearish sentiment.

*BTC CME 2-month forward contract premium vs. Bitcoin/USD. Source: TradingView*

These fixed-month contracts usually trade at a slight premium, indicating that sellers request more money to withhold settlements for longer. As a result, futures should trade at a 0.5% to 2% premium in healthy markets, a situation known as contango.

Notice how the indicator flirted with the backwardation from Jan. 18 to 24 as Bitcoin dipped below $42,000. However, as BTC showed signals that $33,000 could have been a local bottom, the futures markets recovered a healthy 0.5% premium.

Considering that the aggregate cryptocurrency market capitalization is down 22% in 2022, the market structure looks primed for a recovery.

Barring a significant change in these fundamentals, Bitcoin bulls are probably beginning to feel comfortable adding positions below $40,000.

Backwardation in Bitcoin futures contracts shows pro investors lack confidence

July 6, 2021 Coin Telegraph

backwardation

BTC traders are still searching for a bottom, but derivatives metrics show sentiment is negative and even the rally to $40,000 had little impact.

Bitcoin (BTC) might have tested the $40,000 support in mid-July, but according to various derivatives metrics, there has not been a significant change in investor optimism.

This situation either means that price is not what they are looking to mark the end of the current bear market, or that most traders are still underwater at $40,000.

One of the best measures of optimism is the futures market premium, which measures the gap between longer-term contracts and the current spot market levels. In healthy markets, a 5% to 15% annualized premium is expected. However, during bearish markets this indicator fades or turns negative, a situation known as backwardation, and an alarming red flag.

*Huobi 1-month Bitcoin futures basis. Source: Skew*

According to the chart above, the 1-month futures contract has been unable to sustain an annualized premium above 5% since June 18. There have even been some periods of backwardation, including the most recent one on July 5.

There is, of course, the possibility that derivatives markets could decouple from regular spot markets. Maybe investors are unwilling to take the exchange risk, as futures contracts require margin deposits.

Could spot and derivatives markets diverge?

To understand whether the bearish signals seen in derivatives are explicitly tied to these instruments, one should analyze spot market volumes. Typically, bearish markets will present lower trading activity a couple of weeks after the price crash.

*Bitcoin market cap (above) and aggregative trading volume, in USD billion. Source: TradingView*

As predicted, the traded volume peaked in late May but more than halved a couple of weeks later. Although this cannot be deemed a bearish indicator by itself, it expresses a lack of interest in trading at the current levels.

This movement might happen when buyers are scared and, as a result, place scaling bids below market levels, or when sellers have been exhausted. Unfortunately, there's no way to know until a decent amount of volume trades outside of the $650 billion market capitalization area.

Options markets can assist in confirming bearish sentiment

However, there's another way to gauge professional traders' optimism. The 25% delta skew compares similar call (buy) and put (sell) options. When fear is prevalent, the metric will turn positive as the protective put options premium is higher than similar risk call options.

The opposite holds when market makers are bullish, causing the 25% delta skew indicator to shift to the negative area.

*Deribit Bitcoin options 25% delta skew. Source: laevitas.ch*

A 25% delta skew ranging from negative 10% to positive 10% is usually deemed neutral. However, the indicator has been above such a range since June 30, indicating fear from arbitrage desks and market markets.

The last time this indicator showed a bullish sentiment was on April 14, the exact day of the $64,900 all-time high.

Considering that none of the derivatives indicators showed signs of bullishness even as Bitcoin price held above $40,000 on June 15, there is reason to believe that investors are not comfortable opening long positions right now. It remains unknown what will trigger a sentiment change, but it will certainly take more than a single 10% rally.

Traders search for bearish signals after Bitcoin futures enter backwardation

June 18, 2021 Coin Telegraph

backwardation

Analysts search for bearish signals after the June BTC futures trade below spot exchange pricing.

An unusual phenomenon called 'backwardation' is taking place in Bitcoin (BTC) futures trading, mainly the June contract, which expires on June 25.

The fixed-month contracts usually trade at a slight premium, indicating that sellers request more money to withhold settlement longer. Futures should also trade at a 5% to 15% annualized premium on healthy markets, in line with the stablecoin lending rate. This situation is known as contango and is not exclusive to crypto markets.

Whenever this indicator fades or turns negative, this is an alarming red flag. This situation is known as backwardation and indicates a bearish sentiment.

*FTX June BTC futures versus Coinbase USD. Source: TradingView*

As displayed above, a healthy 0.1% to 0.5% premium took place for most of the previous three weeks. This is equivalent to a 2% to 9% annualized rate, therefore oscillating between slightly bearish and neutral.

When short sellers use excessive leverage, the indicator will turn negative, which has been the case on June 17. However, considering there is only one week left for the June expiry, traders should use longer-term contracts to confirm this scenario. As the contract approaches its final trading date, traders are forced to roll over their positions, thus causing exaggerated movements.

*Huobi Sept. BTC futures versus Coinbase USD. Source: TradingView*

The September futures have displayed a 1.7% or higher premium versus spot markets, a 7% annualized basis. This indicates a lack of appetite from longs, but far enough from backwardation.

What's really going on?

The final piece of the puzzle is the funding rate on perpetual contracts, which are retail traders' preferred instrument. Unlike monthly contracts, perpetual futures prices (inverse swaps) trade at a very similar price to regular spot exchanges.

This condition makes retail traders' lives a lot easier as they no longer need to calculate the futures premium or manually roll over positions nearing expiry.

The funding rate is automatically charged every eight hours from longs (buyers) when demanding more leverage. However, when the situation is reversed, and shorts (sellers) are over-leveraged, the funding rate turns negative and they become the ones paying the fee.

*Bitcoin perpetual futures token-margined funding rate. Source: Bybt*

Since May 24, the funding rate has been oscillating between positive 0.03% and negative 0.05% per 8-hour. Thus, on the most "bearish" moments, shorts were paying 1% per week to maintain their positions.

In comparison, on April 13, longs were paying 0.12% per 8-hour, which is equivalent to 2.5% per week.

While many traders point to backwardation as a bearish signal, there is currently no sign of excessive leverage from shorts. As a result, the absence of buyers' interest for the June contract does not accurately reflect the overall market sentiment. If traders had effectively been bearish, both the longer-term futures and perpetual contracts would be displaying this trend.

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