Bitcoin derivatives show a lack of confidence from bulls

August 2, 2022 Coin Telegraph

High correlation to stock markets and recession risks limit optimism on the part of BTC investors.

Bitcoin (BTC) has been trending up since mid-July, although the current ascending channel formation holds $21,100 support. This pattern has been holding for 45 days and could potentially drive BTC towards $26,000 by late August.

*Bitcoin/USD 12-hour price. Source: TradingView*

According to Bitcoin derivatives data, investors are pricing higher odds of a downturn, but recent improvements in global economic perspective might take the bears by surprise.

The correlation to traditional assets is the main source of investors' distrust, especially when pricing in recession risks and tensions between the United States and China ahead of House Speaker Nancy Pelosi's visit to Taiwan. According to CNBC, Chinese officials threatened to take action if Pelosi moved forward.

The U.S. Federal Reserve's recent interest rate hikes to curb inflation brought further uncertainty for risk assets, limiting crypto price recovery. Investors are betting on a "soft landing," meaning the central bank will be able to gradually revoke its stimulus activities without causing significant unemployment or recession.

The correlation metric ranges from a negative 1, meaning select markets move in opposite directions, to a positive 1, which reflects a perfect and symmetrical movement. A disparity or a lack of relationship between the two assets would be represented by 0.

*S&P 500 and Bitcoin/USD 40-day correlation. Source: TradingView*

As displayed above, the S&P 500 and Bitcoin 40-day correlation currently stands at 0.72, which has been the norm for the past four months.

On-chain analysis corroborates longer-term bear market

Blockchain analytics firm Glassnode's "The Week On Chain" report from Aug. 1 highlighted Bitcoin's weak transaction and the demand for block space resembling the 2018–19 bear market. The analysis suggests a trend-breaking pattern would be required to signal new investor intake:

"Active Addresses [14 days moving average] breaking above 950k would signal an uptick in on-chain activity, suggesting potential market strength and demand recovery."

While blockchain metrics and flows are important, traders should also track how whales and market markers are positioned in the futures and options markets.

Bitcoin derivatives metrics show no signs of “fear” from pro traders

Retail traders usually avoid monthly futures due to their fixed settlement date and price difference from spot markets. On the other hand, arbitrage desks and professional traders opt for monthly contracts due to the lack of a fluctuating funding rate.

These fixed-month contracts usually trade at a slight premium to regular spot markets as sellers demand more money to withhold settlement longer. Technically known as "contango," this situation is not exclusive to crypto markets.

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

In healthy markets, futures should trade at a 4% to 8% annualized premium, enough to compensate for the risks plus the cost of capital. However, according to the above data, Bitcoin's futures premium has been below 4% since June 1. The reading is not particularly concerning given that BTC is down 52% year-to-date.

To exclude externalities specific to the futures instrument, traders must also analyze Bitcoin options markets. For instance, the 25% delta skew signals when Bitcoin whales and market makers are overcharging for upside or downside protection.

If option investors fear a Bitcoin price crash, the skew indicator would move above 12%. On the other hand, generalized excitement reflects a negative 12% skew.

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

The skew indicator has been below 12% since July 17, considered a neutral area. As a result, options traders are pricing similar risks for both bullish and bearish options. Not even the retest of the $20,750 support on July 26 was enough to instill "fear" in derivatives traders.

Bitcoin derivatives metrics remain neutral despite the rally toward $24,500 on July 30, suggesting that professional traders are not confident in a sustainable uptrend. Thus, data shows that an unexpected move above $25,000 would take professional traders by surprise. Taking a bullish bet might seem contrarian right now, but simultaneously, it creates an interesting risk-reward situation.

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

Ethereum price falls below $1.1K and data suggests the bottom is still a ways away

June 14, 2022 Coin Telegraph

Ethereum price falls below .1K and data suggests the bottom is still a ways away

Coin Telegraph

ETH price has stalled around the $1,100 level, but several data points suggest the altcoin’s sell-off is far from complete.

Ether (ETH) price nosedived below $1,100 in the early hours of June 14 to prices not seen since January 2021. The downside move marks a 78% correction since the $4,870 all-time high on Nov. 10, 2021.

More importantly, Ether has underperformed Bitcoin (BTC) by 33% between May 10 and June 14, 2022, and the last time a similar event happened was mid-2021.

*ETH/BTC price at Binance, 2021. Source: TradingView*

Even though Bitcoin oscillated in a narrow range two weeks before the 0.082 ETH/BTC peak, this period marked the "DeFi summer" peak when Ethereum's total value locked (TVL) catapulted to $93 billion from $42 billion two months earlier.

What’s behind Ether’s 2021 underperformance?

Before jumping to conclusions, a broader set of data is needed to understand what led to the 31% correction in the ETH/BTC price in 2021. Looking at the number of active addresses is a good place to start.

*Ethereum network daily active addresses, 7-day average. Source: CoinMetrics*

Data shows steady growth in active addresses, which increased from 595,620 in mid-March to 857,520 in mid-May. So, not only did the TVL growth take investors by surprise, but so did the number of users.

The 31% Ether underperformance versus Bitcoin back in June 2021 reflected a cool-off period after unprecedented growth in the Ethereum ecosystem. The consequence for Ether's price was devastating and a 56% correction followed that "DeFi summer."

*Ether/USD price at Coinbase, 2021. Source: TradingView*

One must compare recent data to understand whether Ether is heading to a similar outcome. In that sense, those who waited for the 31% miss versus Bitcoin's price bought the altcoin at a cycle low near $1,800 on June 27, 2021 and the price increased 83% in 50 days.

Is Ether flashing a buy signal right now?

This time, there is no DeFi Summer and before this year’s 33% negative performance versus Bitcoin, the active address indicator was already slightly bearish.

By May 10, 2022, Ethereum had 563,160 active addresses, in the lower range from the past couple of months. This is the exact opposite of the mid-2021 movement that occurred as Ether price accelerated its losses in BTC terms.

One might still think that despite a relatively flat number of users, the Ethereum network had been growing by presenting a higher TVL.

*Ethereum network total value locked, USD. Source: Defillama*

Data shows that on May 10, 2022, the Ethereum network TVL held $87 billion in deposits, down from $102 billion a month prior. Therefore, there is no correlation between the mid-2021 cool-off after "DeFi summer" and the current 33% Ether price downturn versus BTC.

These metrics show no evidence of similarity between the two periods, but $1,200 might as well be a cycle low, and this will depend on other factors apart from the network's use.

Considering how weak active addresses and TVL data were before the recent price correction, investors should be extra careful when trying to predict a market bottom.

FTX US Chief Brett Harrison Says Crypto Markets’ Correlation With Stocks Not What Traders Think – Here’s Why

June 13, 2022 The Daily Hodl

$32K Bitcoin price could turn the tides in Friday’s $160M BTC options expiry

June 2, 2022 Coin Telegraph

K Bitcoin price could turn the tides in Friday’s 0M BTC options expiry

Coin Telegraph

BTC price lost the momentum that had pushed it to $32,300 on May 31, but this week’s option expiry could help bulls recapture the key price level.

Twenty-three agonizing days have passed since Bitcoin (BTC) last closed above $32,000 and the 10% rally that took place on May 29 and 30 is currently evaporating as BTC price retraces toward $30,000. The move back to $30,000 simply confirms the strong correlation to traditional assets and in the same period, the S&P 500 also retreated 0.6%.

*Bitcoin/USD 12-hour price at Kraken. Source: TradingView*

Weaker corporate profits could pressure the stock market due to rising inflation and the upcoming U.S. Federal Reserve interest rate hikes, according to Citi strategist Jamie Fahy. As reported by Yahoo! Finance, Citi’s research note to clients stated:

“Essentially, despite concerns regarding recession, earnings per share expectations for 2022/2023 have barely changed.”

In short, the investment bank is expecting worsening macroeconomic conditions to reduce corporate profits, and in turn, cause investors to reprice the stock market lower.

According to Jeremy Grantham, co-founder and chief investment strategist of GMO, “We should be in some sort of recession fairly quickly, and profit margins from a real peak have a long way that they can decline.”

As the correlation to the S&P 500 remains incredibly high, Bitcoin investors fear that the potential stock market decline will inevitably lead to a retest of the $28,000 level.

*S&P 500 and Bitcoin/USD 30-day correlation. Source: TradingView*

The correlation metric ranges from a negative 1, meaning select markets move in opposite directions, to positive 1, which reflects a perfect and symmetrical movement. A disparity or a lack of relationship between the two assets would be represented by 0.

Currently, the S&P 500 and Bitcoin 30-day correlation stands at 0.88, which has been the norm for the past couple of months.

Bearish bets are mostly below $31,000

Bitcoin's recovery above $31,000 on May 30 took bears by surprise because only 20% of the put (sell) options for June 3 have been placed above such a price level.

Bitcoin bulls may have been fooled by the recent $32,000 resistance test and their bets for the $825 million options expiry go all the way to $50,000.

*Bitcoin options aggregate open interest for June 3. Source: CoinGlass*

A broader view using the 0.77 call-to-put ratio shows more bearish bets because the put (sell) open interest stands at $465 million against the $360 million call (buy) options. Nevertheless, as Bitcoin currently stands above $31,000, most bearish bets will likely become worthless.

If Bitcoin's price remains above $31,000 at 8:00 am UTC on June 3, only $90 million worth of these put (sell) options will be available. This difference happens because there is no use in a right to sell Bitcoin at $31,000 if it trades above that level on expiry.

Bulls might pocket a $160 million profit

Below are the four most likely scenarios based on the current price action. The number of options contracts available on June 3 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

Between $29,000 and $30,000: 1,100 calls vs. 5,100 puts. The net result favors bears by $115 million.
Between $30,000 and $32,000: 4,400 calls vs. 4,000 puts. The net result is balanced between call (buy) and put (sell) instruments.
Between $32,000 and $33,000: 6,600 calls vs. 1,600 puts. The net result favors bulls to $160 million.
Between $33,000 and $34,000: 7,600 calls vs. 800 puts. Bulls extend their gains to $225 million.

This crude estimate considers the call options used in bullish bets, and the put options exclusively in neutral-to-bearish trades. Even so, this oversimplification disregards more complex investment strategies.

Bears have less margin required to suppress Bitcoin price

Bitcoin bears need to pressure the price below $30,000 on June 3 to secure a $115 million profit. On the other hand, the bulls' best case scenario requires a push above $33,000 to increase their gains to $225 million.

However, Bitcoin bears had $289 million leverage short positions liquidated on May 29, according to data from Coinglass. Consequently, they have less margin required to push the price lower in the short term.

With this said, the most probable scenario is a draw, causing Bitcoin price to range near $31,000 ahead of the June 3 options expiry.

Crypto Market Turning Point — Most Cryptocurrencies Down 57% to Over 80% From Price Highs

May 25, 2022 Bitcoin.com

Bitmex Co-Founder Arthur Hayes Says Bitcoin Could Drop to $30K Amid a Stock Market Rout

April 11, 2022 Bitcoin.com

Bitcoin traders say $34K was the bottom, but data says it’s too early to tell

February 25, 2022 Coin Telegraph

Bitcoin traders say K was the bottom, but data says it’s too early to tell

basis

Bitcoin traders say the bottom is in, but it’s important to also consider BTC’s correlation to equities markets.

Bitcoin (BTC) price traded down 23% in the eight days following its failure to break the $45,000 resistance on Feb. 16. The $34,300 bottom on Feb. 24 happened right after the Russian-Ukraine conflict escalated , triggering a sharp sell-off in risk assets.

While Bitcoin reached its lowest level in 30 days, Asian stocks were also adjusting to the worsening conditions, a fact evidenced by Hong Kong's Hang Seng index dropping 3.5% and the Nikkei also reached a 15-month low.

*Bitcoin/USD at FTX. Source: TradingView*

The first question one needs to answer is whether cryptocurrencies are overreacting compared to other risk assets. Sure enough, Bitcoin's volatility is much higher than traditional markets, running at 62% per year.

As a comparison, the United States small and mid-cap stock market index Russell 2000 holds a 30% annualized volatility. Meanwhile, as measured by the MSCI China index, Chinese equities stand at 32%.

*Bitcoin/USD (purple, left scale) vs. Hang Seng Index (blue) & Russell 2000 (orange)*

There is a high correlation between Bitcoin, the Hang Seng stock market and the U.S. Russell 2000 Index. A possible explanation is the U.S. Federal Reserve's tightening objectives. By reducing bond buybacks and threatening to increase the interest rates, the monetary authority has caused a "flight to safety" movement.

Despite the non-existent returns adjusted by the 7.5% inflation, investors often seek protection on cash U.S. dollar positions and Treasury ills. This is especially true during periods of extreme uncertainty.

Bitcoin futures traders are moderately bearish

To understand how professional traders are positioned, one should monitor Bitcoin derivatives. The Bitcoin futures' annualized premium should run between 5% to 12% to compensate traders for "locking in" the money for two to three months until the contract expiry.

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

Levels below 5% are extremely bearish, while an annualized premium above 12% indicates bullishness. As shown above, the futures premium dropped below 5% on Feb. 9, displaying a lack of confidence from professional traders.

Although the current 2.5% represents the lowest level since July 20, this date marked a reversal from a 74-day price correction. In fact, a 71% rally followed that event, confirming the thesis that the futures premium is a backward-looking indicator.

*Bitcoin/USD (blue) and 30-day correlation vs. Russell 2000 (purple). Source: TradingView*

Notice how Bitcoin’s correlation versus the Russell 2000 Index was relatively high on July 20. However, that situation quickly reversed as BTC initiated its rally, independent from traditional markets.

The bottom could be in, but uncertainty could lead to further downside

Similar to the futures premium, the correlation metric uses historical data, so it should not be used to predict trend reversals. Investors, particularly professional fund managers, tend to avoid high volatile assets during turbulent markets.

Understanding market psychology is essential for avoiding unexpected price swings. Therefore, as long as Bitcoin remains considered a risky asset by market participants, these short-term corrections should be the norm rather than the exception.

Therefore, it makes sense to wait for further decoupling signs before predicting a Bitcoin bottom.

Here’s why Bitcoin traders shouldn’t overanalyze US inflation data

February 11, 2022 Coin Telegraph

CNBC

Analysts say record high inflation in the United States is impacting crypto market momentum, but is the impact of the data overstated to the detriment of investors?

Analysts and pundits will scramble to find some angle to explain intra-day price action whenever important economic numbers are published and this practice is commonplace in the crypto sector.

When the United States Bureau of Labor Statistics reported a 7.5% increase in the Consumer Price Index (CPI) on Feb. 10, traders rushed to find some connection to the crypto price action. However, historical correlation data shows investors should actually closely scrutinize whether there is even a relation between Bitcoin (BTC) and major economic indicators.

General investment advice would suggest that traders ignore the intraday movements, especially considering that most assets do not trade on a 24-hours basis.

More importantly, Bitcoin’s order book depth pales in comparison to gold, WTI and the S&P 500 futures. Even if one aggregates stablecoin trading, Bitcoin’s 7-day average volume is $7 billion, whereas the three largest S&P 500 exchange-traded funds handle $54 billion.

In short, a large order flow from a single entity could easily distort the cryptocurrency market in the short term, but the impact on WTI oil, the S&P 500 and gold tends to be smaller.

Does Bitcoin price anticipate inflation data?

Bitcoin price dipped to $43,200 after the 7.5% increase in the U.S. consumer price index was released on Feb. 10, leading reporters at CNBC to correlate the two events.

Bitcoin dips slightly as 10-year Treasury yield tops 2% on hotter-than-expected inflation report https://t.co/bI8NzMQRPD
— CNBC (@CNBC) February 10, 2022

That statement correctly assessed the market conditions at that time, but one should use a longer time frame when analyzing economic data. Furthermore, there’s the possibility that Bitcoin holds no relevant price correlation, a hypothesis that also needs testing.

A comparative long-term chart between Bitcoin price and U.S. inflation gives a false impression of correlation and causation, especially when using logarithmic charts.

*U.S. CPI (orange, left) vs. Bitcoin/USD (blue, right). Source: TradingView*

If anything, Bitcoin has anticipated the economic data by roughly three months. In September 2020, it rallied above $11,000 while the inflation data stagnated below 1.5% and more recently in May 2021.

Afterward, the Bitcoin price “cooled off,” failing to break the $60,000 support while the sharp increase in CPI paused two months later in July at 5.4%.

For those relying on mathematical formulas, the correlation coefficient between Bitcoin price and U.S. inflation oscillated between positive 0.95 and negative 0.94 over the past 12 months. Therefore, associating one to another makes very little sense from a statistical approach.

Do traditional markets really show correlation with Bitcoin?

Another common mistake is attributing the correlation of other assets to Bitcoin’s performance. Sure enough, there might be a couple of consecutive months of 0.65 (positive or negative) correlation over a year-long period, but data suggests otherwise.

*Bitcoin, S&P500, WTI Oil, and TIP ETF 30-day correlation charts. Source: TradingView*

For instance, between August and September 2021, the S&P 500 correlation to BTC averaged 0.65. However, that is cherry-picking data because a more extended timeframe reveals no such evidence.

No price relation was found between Bitcoin and other major assets such as the WTI oil price and the iShares TIPS Bond ETF, which tracks an index composed of inflation-protected U.S. Treasury bonds.

Various data points suggest that investors should ignore the intraday price action after economic data is released, because at times, the data provides a false impression between correlation and causation.

Although inflation or other data influence short-term pricing, it does not necessarily impact the prevailing trend. The correlation chart versus traditional markets leaves little doubt that Bitcoin is a class of its own.

Here’s why Bitcoin might be safe from a global stock market crisis

September 19, 2021 Coin Telegraph

Bitcoin

BTC’s lack of integration with traditional finance and its inability to be forcefully sold to cover financial losses mean the price might not ‘collapse’ if there is a global stock market meltdown.

One of the reasons behind Bitcoin's (BTC) volatility, the substantial price oscillations that occur regularly, is the discrepancy of its use cases. Some pundits deem it "digital gold," a truly scarce and perfect store of value (SoV). Others consider Bitcoin a technology project or a type of software with a corresponding network.

El Salvador's adoption as legal tender will likely evidence the means of exchange (MoE) functionality that the Lightning Network provides. The Layer-2 scaling solution allows instant and insanely cheap transfers, although it requires regular on-chain transactions to enter or exit this parallel network.

As these narratives about Bitcoin shift over time, so does BTC's correlation to traditional assets. For example, there have been sustained periods of a strong correlation with gold.

*Bitcoin vs. gold (precious metal) in 2020. Source: TradingView*

The March 2020 crash was devastating for almost every asset class, but the recovery pattern that followed those six or seven months was virtually identical for gold and Bitcoin. Curiously, the opposite movement occurred in 2021, displaying an inverse correlation between the two assets.

Is Bitcoin a tech stock proxy?

On the other hand, Bitcoin started to mimic the Hong Kong stock market, as measured by the Hang Seng Index (HSI). Among its top constituents are Tencent, Alibaba, and Meituan, which are billion-dollar Asian technology companies.

*Bitcoin vs. Hang Seng Index (stocks). Source: TradingView*

This shift in investors' perspective — from tracking gold price to tech stocks — begs one the question of whether Bitcoin will succumb to the Hang Seng downward movement seen in the past 90 days. Does it make sense to decouple right now? If so, will Bitcoin continue to act as a safe haven amid a general correction?

On Sept. 14, China's second-largest property developer, Evergrande Group, announced that a significant decline in sales forced the company to postpone payments over its debt. This single company has over $300 billion in liabilities, which and according to analysts this could severely impact the broader market.

In August, China's retail sales disappointed at 2.5% versus the previous year, where investors expected a 7% growth rate. Obviously, growth and the economy were heavily impacted in 2020 by governments' reaction to the Covid-19 outbreak.

However, one must consider that the most influential Central Banks have been practicing near zero or even negative interest rates since the Q1 of 2020. Thus, if the economy fails to gain momentum amid multiple trillion-dollar stimulus packages, there's not much that can be done to prevent a generalized stock market correction and potential losses on debt markets.

The problem is: Bitcoin might be 12 years old, but it has never faced a significant economic crisis, at least nothing that puts the $250 trillion-plus global debt markets at risk. Therefore, any analysis or estimate will unlikely yield a credible assessment.

Bitcoin might be less impacted by a market meltdown

However, the cryptocurrency has an edge over traditional markets like commercial real estate, stocks, and bonds. Lenders will foreclose on these assets if clients default on their payments, and this adds further pressure because the bank or institution has no interest in keeping them.

On the other hand, generally speaking, Bitcoin and cryptocurrencies cannot be used as collateral.

Regarding the billion-dollar Bitcoin futures liquidations on derivatives markets, those are just synthetic instruments. Undoubtedly these events will impact the price, but at the end of the day, the effective BTC stays at the derivatives' exchange. It solely moves from the long (buyer) balance to the short (seller) account.

Until Bitcoin becomes fully entrenched in financial markets and accepted as collateral and deposits, the mid-term systemic risk for the cryptocurrency is lower than the traditional market.

Data suggests the strong US dollar makes Bitcoin weaker argument is flawed

June 19, 2021 Coin Telegraph

Bitcoin

Analysts and traders are linking Bitcoin's bearish turn with the growing strength of the U.S. dollar, but data suggests otherwise.

At the moment, there seems to be a general assumption that when the U.S. dollar value increases against other global major currencies, as measured by the DXY index, the impact on Bitcoin (BTC) is negative.

For the past few weeks, analysts and influencers have been issuing alerts about this inverse correlation, which held true until March 2021.

So I guess we're not all obsessed with $DXY anymore? Because it's looking super bullish & had provided an almost perfect inverse correlation for over a year. Either way we're about to find out if $BTC has matured to the point of being uncorrelated. ️ #Banks #Brrrr #Bitcoin pic.twitter.com/gequzmr6p2
— Alex Saunders ‍ (@AlexSaundersAU) February 2, 2021

What could be the trigger of #Bitcoin top? A #DXY bottom! And we may just have that around the corner! https://t.co/1Cy03QuMgb pic.twitter.com/zKUh9CWc72
— Henrik Zeberg (@HenrikZeberg) January 2, 2021

However, no matter if you track a 20-day or 60-day correlation, the situation reversed over the past three months.

*Dollar Index DXY (blue) vs. Bitcoin (orange, logarithmic). Source: TradingView*

The correlation indicator (red) has been ranging above 50% since mid-March, indicating that both DXY and Bitcoin have generally followed a similar trend.

The dollar strengthened after the Fed speech

As Cointelegraph reported, May's Consumer Price Index (CPI) report showed inflation hitting a 13-year high, and Federal Reserve Chair Jerome Powell acknowledged that inflation could run higher than planned in the short term. Still, he clarified that "longer-term inflation expectations are anchored at a place that is consistent with our goal."

The market gave the Fed a 'vote of confidence,' causing the U.S. dollar to appreciate versus major global currencies. Meanwhile, Bitcoin dropped 8% to a $35,300 low on June 18, further reinforcing the inverse correlation thesis.

Correlation is a longer-term indicator, not an intraday metric

Even though pundits and influencers love to dissect those events and extrapolate 1-day movements, one should analyze a more extended timeframe to understand the potential impacts of the DXY index on the Bitcoin price.

Notice how both markers weakened during May, after a relatively flat period in late April. It seems premature, at least, to call the recent decoupling an inverse correlation. Multiple forces could be behind Bitcoin's failure to sustain a $40,000 support on June 16 and the subsequent price correction.

For starters, Liu He, Vice Premier of China and a member of the all-powerful eight-person politburo, led a meeting on preventing and controlling financial risks on May 24. Among the decisions was a crackdown on Bitcoin mining and trading activities.

Bitcoin's hash rate dropped to the lowest level since November 2020 as miners are starting to move away from China. Huobi temporarily suspended futures trading to Chinese users, while Futures platform Bybit revealed it would have closed accounts registered with Chinese phone numbers.

Furthermore, on May 26, the United States Securities and Exchange Commission Chair Gary Gensler said the regulators are looking forward to working with fellow regulators and Congress to fill gaps in investor protection in crypto markets.

Therefore, the potential U.S. regulation and the current China crackdown on mining and trading activities seem vital to Bitcoin's recent underperformance. Once those issues are no longer threats, the gap that has been created from DXY's positive move could fade away.

Correlation