Ethereum bears look to score on Friday’s $340M weekly ETH options expiry

September 30, 2021 Coin Telegraph

Ethereum bears look to score on Friday’s 0M weekly ETH options expiry

Derivatives data shows bears have sufficient incentives to keep ETH price below $3,000 heading into Friday’s $340 million options expiry.

Ether (ETH) price has seen quite a bit of volatility lately and to the surprise of many traders, the $4,000 level continues to present considerable resistance. Currently, the price is respecting the upward channel which started in August but every time the support is tested, the risk of an aggressive correction increases. With that in mind, this Friday's $340 million options expiry will likely be dominated by neutral-to-bearish put options.

*Ether price at Bitstamp in USD. Source: TradingView*

Bulls placed larger bets for the expiry but it appears that they were too optimistic for Oct. 1, so their $215 million call (buy) options are getting closer to becoming with the looming approach of the expiry date.

It’s possible that Ether could be a victim of its own success because the demand for decentralized finance (DeFi) applications and the minting of non-fungible tokens (NFT) continue to clog the network. This has caused the average gas fee to surpass $20 over the past ten days.

*Largest gas spenders past 24 hours. Source: etherscan.io*

Notice above how OpenSea, the largest NFT marketplace, represents over 20% of the entire Ethereum network’s gas use in the past 24 hours.

When analyzing the incredible demand for blockchain transactions, Polygon's co-founder, Sandeep Nailwal, says it is a matter of time before Ethereum overtakes Bitcoin as the dominant layer-1 protocol.

However, negative news continues to emerge as the fourth-largest Ethereum mining pool will shut down operations in China, citing "regulatory policies." Furthermore, SparkPool, the second-largest Ether mining pool, will also cease operations this month.

As for the $340 million options expiry on Friday, bulls need to push the price above $3,000 to avoid significant bearish pressure.

*Ethereum options aggregate open interest for Oct. 1. Source: Bybt.com*

As noted above, bulls were caught by surprise because the call (buy) instruments were placed at $2,900 or higher. Consequently, if Ether remains below that price on Sept. 17, only $1.4 million worth of neutral-to-bullish call options will be activated on the expiry.

This means that a $3,000 put option becomes worthless if Ether remains below that price at 8:00 am UTC on Oct. 1.

Bulls placed more bets, but there's a catch

The 1.74 call-to-put ratio represents the slight difference between the $215 million worth of call (buy) options versus the $125 million put (sell) options. Although favoring bulls, this broader view needs a more detailed analysis because some of those bets are implausible considering the current $2,800 price.

Below are the four most likely scenarios for Ether price. The imbalance favoring either side represents the theoretical profit from the expiry.

Depending on the expiry price, the quantity of calls (buy) and puts (sell) contracts becoming active varies:

Between $2,400 and $2,500: 0 calls vs. 38,050 puts. The net result is $95 million favoring the protective put (bear) instruments.
Between $2,500 and $2,800: 100 calls vs. 22,300 puts. The net result is $60 million favoring the protective put (bear) instruments.
Between $2,800 and $3,000: 2,300 calls vs. 13,800 puts. The net result is $33 million favoring the protective put (bear) instruments.
Between $3,000 and $3,200: 9,600 calls vs. 6,700 puts. The net result is balanced between bears and bulls.

This raw estimate considers call options being exclusively used in bullish strategies and put options in neutral-to-bearish trades. However, investors might have used more complex strategies that typically involve different expiry dates.

Bulls are wrecked one way or another

Bears have absolute control of Friday's expiry and they have sufficient incentive to keep pressuring the price below $2,800. However, one must consider that during negative price trends, like now for Ether, a seller might cause a 2% negative move by placing large offers and making aggressive sales.

On the other hand, bulls need a 7% positive price swing taking Ether above $3,000 to balance Friday's options expiry. It is impossible to calculate how much a trader needs to spend to drive the market that way, although it seems a colossal task.

If no surprises come before Oct. 1, Ether's price should keep trading below $2,800.

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

Signs of fear emerge as Ethereum price drops below $3,000 again

September 28, 2021 Coin Telegraph

Signs of fear emerge as Ethereum price drops below ,000 again

Arbitrage

Traders have yet to flip bearish on Ether price, but the recurrent drops below $3,000 increase the likelihood of a sentiment flip.

Technical analysis is a controversial topic, but higher lows are commonly interpreted as a sign of strength. On Sept. 28, Ether (ETH) might be 30% below its May 12 high of $4,380, but the current $3,050 price is 78% higher than the six-month low of $1,700. To understand whether this is a “glass half full” situation, one must analyze how retail and pro traders are positioned according to derivatives markets.

*Ether price on Coinbase in USD. Source: TradingView*

On Sept. 24, Chinese authorities announced new measures to curb crypto adoption, causing the second-largest Ethereum mining pool (Sparkpool) to suspend operations on Sept. 27. According to Sparkpool, the measures are intended to ensure the safety of users’ assets in response to “regulatory policy requirements.”

Binance also announced that it would halt fiat deposits and spot crypto trading for Singapore-based users in accordance with local regulatory requests. Huobi, another leading derivatives and spot exchange in Asia, also announced that it would retire existing Mainland China-based user accounts by year-end.

Pro traders are neutral, but fear is starting to settle in

To assess whether professional traders are leaning bullish, one should start by analyzing the futures premium — also known as the basis rate. This indicator measures the price gap between futures contract prices and the regular spot market.

Ether quarterly futures are the preferred instruments of whales and arbitrage desks. Although it might seem complicated for retail traders due to their settlement date and price difference from spot markets, their most significant advantage is the lack of a fluctuating funding rate.

*Ether three-month futures basis rate. Source: Laevitas*

The three-month futures usually trade with a 5% to 15% annualized premium, comparable to the stablecoin lending rate. By postponing settlement, sellers demand a higher price, causing the price difference.

As depicted above, Ether’s dip below $2,800 on Sept. 26 caused the basis rate to test the 5% threshold.

Retail traders usually opt for perpetual contracts (inverse swaps), where a fee is charged every eight hours depending on which side demands more leverage. Thus, to understand if longs are panicking due to the recent newsflow, one must analyze the futures markets’ funding rate.

*Ether perpetual futures 8-hour funding rate. Source: Bybt*

In neutral markets, the funding rate tends to vary from 0% to 0.03% on the positive side. This number is equivalent to 0.6% per week and indicates that longs are the ones paying it.

Between Sept. 1 and 7, a moderate spike in the funding rate took place, but it dissipated as a sudden crypto crash caused $3.54 billion worth of future contracts liquidations. Apart from some short-lived, slightly negative periods, the indicator has held flat ever since.

Both professional traders and retail investors seem unaffected by the recent $2,800 support being tested. However, the situation could quickly revert, and “fear” could emerge if Ether falls below such a price level, which has been holding strong for 52 days.

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.

DeFi farmers boast about gaming dYdX airdrop as prices surge

September 28, 2021 Coin Telegraph

Airdrop

DeFi farmers are claiming to have made hundreds of thousands of dollars by gaming dYdX ‘s recent airdrop.

As dYdX’s governance token gains amid speculation that Chinese traders could be migrating to the derivatives DEX, savvy DeFi farmers are claiming to be sitting on six-figure stashes after gaming the protocol’s recent airdrop.

DYDX has gained 85% in two days as reports claim that China’s crypto traders are converging on the decentralized margin trading protocol as Beijing moves to further crack down on digital assets.

The exchange’s governance token was airdropped to users on Sept. 8. As the number of tokens received by users was determined by historic trading activity on the exchange, news of the airdrop drove a flurry of activity as farmers flocked to the platform to capitalize on the free tokens.

With DYDX tokens currently trading at $21 and its market capitalization surpassing $1 billion, many airdrop recipients have made off with significant profits.

Some users have taken to Twitter to boast of their airdrop earnings, describing how they sought to game the protocol by trading the same assets on the platform between multiple wallets under their control to qualify for hundreds of thousands worth of rewards.

My free $DYDX airdrop is worth $900,000. Good morning.
— Carter (@moneywithcarter) September 23, 2021

Twitter user Daniel Que tweeted that their airdrop is “worth $420K now,” noting that he would have been excluded from the event if he were still residing in the United States

“Moving to Taiwan (and not getting a Green Card) was a good call,” he said.

Others were not so lucky, with many users complaining about having been “protected” from the airdrop by the U.S. Securities and Exchange Commission.

7/ The SEC now wants to use this same system to “protect” you from crypto. If you were one of the many Americans “protected” from @dydxprotocol 's $1 billion airdrop, it’s because dydx doesn’t report information to the SEC like a company from the 1980s.
— myss3lium industri3s (@mysselium) September 27, 2021

DYdX has seen impressive fundamental growth this year, with derivatives volume gaining 2,583% over a 3 month period since June 30. On Sept. 27, the margin trading DEX’s daily volume outpaced that of leading U.S. spot exchange Coinbase for the first time.

The total value locked on the platform has just hit an all-time high of $503 million according to L2beat, which ranks it as the second-largest layer-two network by total value locked (TVL) behind Arbitrum. The exchange currently represents 20% of all second-layer TVL.

Derivatives DEX dYdX beats out Coinbase by volume amid China FUD

September 27, 2021 Coin Telegraph

China

Chinese traders appear to be flocking to derivatives DEX dYdX amid concerns over a renewed crypto crackdown in China.

Decentralized derivatives exchange dYdX has seen a surge in trade activity as concerns surrounding a renewed Chinese crypto crackdown have circulated this year, with the DEX now processing more volume than Coinbase for the first time.

According to CoinGecko, dYdX has facilitated more than $4.3 billion worth of trades in the past 24-hours, beating out Coinbase $3.7 billion in volume by nearly 15%. DYdX founder and former Coinbase employee Antonio Juliano celebrated the milestone in a Sept. 27 tweet.

5 years ago I left @coinbase and eventually founded dYdX

Today, for the first time, @dydxprotocol is doing more trade volume than Coinbase pic.twitter.com/QzoKAUpH29
— Antonio | dYdX (@AntonioMJuliano) September 26, 2021

The surging growth for dYdX comes amid renewed concerns regarding the threat heavy-handed Chinese regulation could pose for the global crypto sector.

On Sept. 24, Beijing intensified its crackdown on crypto assets by banning all digital currency transactions. The People's Bank of China said in a statement that cryptocurrencies are “not legal and should not and cannot be used as currency in the market.” As reported by Cointelegraph, China has "banned" or caused FUD in the crypto space on 19 separate occasions since 2009.

In a Sept. 26 tweet, China-based crypto reporter Colin Wu noted a recent surge in demand for decentralized exchanges and other DeFi products among Chinese users, stating:

“A large number of Chinese users will flood into the DeFi world, and the number of users of MetaMask and dYdX will greatly increase. All Chinese communities are discussing how to learn defi.”

In late June, one of China’s largest crypto exchanges, Huobi, banned domestic derivatives trading. The following month, Huobi closed its China-based exchange operator as pressure from Beijing escalated before halting all new registrations for Chinese users on Sept. 24.

Over the past 6 months, dYdX has grown by 19,700% in terms of daily exchange trade volumes which were just $22 million at the end of April according to CoinGecko.

Coinbase comparatively has remained relatively flat in terms of exchange volume growth over the same period with around 6%. Coinbase volumes did surge to an all-time high of $19 billion in late May when crypto markets were also at their peak.

Wu also noted that other derivatives exchanges were seeing an uptick in Chinese registrations, stating “FTX registrations may also be on the rise. The Chinese community is sharing its registration link.”

DYdX offers a range of perpetual contracts on various crypto assets allowing traders to hold leveraged positions without using contracts with a fixed expiration date.

L2beat, which tracks data for layer two protocols, is reporting that dYdX is currently second in terms of total market share with around 19% and $478 million in total value locked, an increase of 20% over the past 7 days.

In September 2019, Coinbase invested 1 million USDC stablecoins into dYdX in what it called a USDC Bootstrap Fund. In June this year, dYdX raised $65 million in a Series C funding round led by venture fund Paradigm.

Derivatives data suggests Solana has reached a short-term top

September 25, 2021 Coin Telegraph

ATOM

SOL's futures open interest recently hit $1 billion and while the recent price swing liquidated leveraged longs, data suggests the short-term top is not a bearish trend reversal.

Solana (SOL) reached a $216 all-time high on Sept. 9 after rallying 508% since Aug. The bull run caused some analysts to project a $500 target which would translate to a $150 billion market capitalization.

It is worth noting that during SOL's rally, the Ethereum network's average transaction fee had surpassed $40. Surging interest in the NFT market accelerated investors' transition to Solana, which was boosted by FTX's NFT marketplace launch on Sept. 6.

*Solana, Avalanche, and Cosmos price at Binance. Source: TradingView*

The above chart shows SOL's two-month performance compared to Avalanche (AVAX) and Cosmos (ATOM). Both are fighting for the same decentralized application user-base and offer faster and cheaper transactions compared to Ethereum (ETH).

Major players in the industry also invested in Solana's ecosystem due to its potential against Ethereum. In June, Andreessen Horowitz and Polychain Capital led a $314-million funding round in Solana Labs, which was also funded by venture capital firm Andreessen Horowitz, Polychain Capital and Alameda Research.

Is Solana's outage weighing on SOL price?

At SALT Conference 2021, Solana founder and CEO Anatoly Yakovenko told Cointelegraph that the network "is optimized for a specific use case: online central limit order book, a trading method used by exchanges that matches bids with offers. It was designed for market makers who need to submit millions of transactions per day."

Yakovenko then added: "There are Pareto efficiency tradeoffs. If I optimize for hash power security, that means I can't have a lot of TPS. You have to pick one or the other."

Curiously, on Sept. 14, the Solana network experienced an outage that lasted over 12 hours. The team explained that a large increase in transaction load to 400,000 per second had overwhelmed the network, creating a denial-of-service that caused validators to start forking.

*Solana futures aggregate open interest. Source: Bybt.com*

Despite the recent setback, Solana futures markets aggregate open interest sits at $1 billion, a 640% increase in two months. This figure makes Solana's derivatives market the third largest, behind Bitcoin (BTC) and Ether. This data confirms investors' interest, but it can't be deemed bullish because futures buyers (longs) and sellers (shorts) are matched at all times.

Derivatives markets point toward a balanced situation

To answer this question, one must analyze the funding rate. Perpetual contracts, also known as inverse swaps, have an embedded rate usually charged every eight hours. This fee ensures there are no exchange risk imbalances. A positive funding rate indicates that longs (buyers) are the ones demanding more leverage.

However, the opposite situation occurs when shorts (sellers) require additional leverage, and this causes the funding rate to turn negative.

*Solana perpetual futures 8-hour funding rate. Source: Bybt.com*

As depicted above, the eight-hour fee reached a 0.12% peak on Sept. 5, which is equivalent to 2.5% per week. This momentary spike seized rapidly as SOL faced extreme volatility on Sept. 7. After peaking at $195, the SOL price crashed by 35% within 9 hours and liquidated leveraged positions, leading to the current balance between the longs and shorts.

Data shows no evidence of investors rushing to add leveraged long positions despite the current $1 billion open interest. Moreover, considering the 410% gain in the last two months, traders have reason to fear further downside because Bitcoin has also failed to break the $50,000 psychological barrier and it is yet to confirm if the recent sub-$40,000 dip was the short-term bottom.

All bark and some bite. China’s Bitcoin ban puts traders in the ‘fear’ zone

September 24, 2021 Coin Telegraph

bitcoin options

Bitcoin derivatives markets flipped neutral-to-bearish after China’s ‘crypto ban’ announcement triggered a BTC price dip to $40,600.

China bans Bitcoin (BTC), again.

No, we’re not traveling back in time. On Sept. 24, the People’s Bank of China (PBoC) published a new set of measures to promote inter-departmental coordination on cracking down on crypto activity. The measures intended to “cut off payment channels, dispose of relevant websites and mobile applications in accordance with the law.”

Most investors may have missed the $3 billion BTC and $1.5 billion Ether (ETH) monthly options expiry that took place less than one hour before the crypto ban news came out. According to “Molly”, a former Bitcoin Magazine contributor, the remarks from China were originally posted on Sept. 3.

However, if some entity were aiming to profit from the negative price swing, releasing the news ahead of the expiry at 8:00 am UTC on Friday would have made more sense. For example, the $42,000 protective put option became worthless because the Deribit expiry price was $44,873. That option holder had a right to sell Bitcoin at $42,000, but there’s no value in that if BTC expiry happens above that level.

For the conspiracy theorists out there, the Chicago Mercantile Exchange (CME) Bitcoin futures expiry is the average price between 2:00 pm and 3:00 pm UTC. Consequently, the potential $340 million open interest settled near the $42,150 level. In the futures markets, buyers (longs) and sellers (shorts) are matched at all times, thus making it virtually impossible to guess which side has larger firepower.

*Bitcoin price at Bitstamp in USD. Source: TradingView*

Despite the $4,000 negative price swing, aggregate liquidations on leveraged long futures contracts were less than $120 million. This data should be highly worrisome for bears because it signals that bulls are not overconfident and that they are not using extreme leverage.

Pro traders showed some doubt but remained neutral

To analyze how bullish or bearish professional traders are, one should monitor the futures premium — also known as “basis rate.”

The indicator measures the difference between longer-term futures contracts and the current spot market levels. A 5% to 15% annualized premium is expected in healthy markets, which is a situation known as contango.

This price gap is caused by sellers demanding more money to withhold settlement longer, and a red alert emerges whenever this indicator fades or turns negative, known as “backwardation.”

*Bitcoin 3-month future contracts basis rate. Source: Laevitas.ch*

Notice how the sharp decrease caused by the negative 9% move on Sept. 24 caused the annualized futures premium to reach its lowest level in two months. The current 6% indicator lies at the bottom of the “neutral” range, ending a moderate bullish period that lasted until Sept. 19.

To confirm whether this movement was specific to that instrument, one should also analyze options markets.

Option markets confirm traders are entering the “fear” zone

The 25% delta skew compares similar call (buy) and put (sell) options. The metric will turn positive when “fear” is prevalent 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. Readings between negative 8% and positive 8% are usually deemed neutral.

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

The 25% delta skew had been ranging in the neutral zone since July 24, but it spiked to 10% on Sept. 22, signaling “fear” from options traders. After a brief retest of the neutral 8% level, today’s Bitcoin price action has caused the indicator to rise above 11%. Once again, a level last seen two months ago, and very similar to BTC futures markets.

Although no bearish signs emerged from the Bitcoin derivatives market, today’s dip below $41,000 marked professional traders flip to “fear” mode. The result of this is that futures contracts traders are reluctant to open leverage long positions, while option markets display a premium for protective put options.

Unless Bitcoin shows strength during the weekend, bears might profit from investors’ current panic.

Acting OCC head warns that ‘fools gold’ in DeFi reminds him of lead-up to GFC

September 24, 2021 Coin Telegraph

Coin Telegraph

While crypto has been mostly weathered past hacks, scams, and crashes, acting OCC head Michael Hsu warns the risks may be multiplying as the technology goes mainstream.

Acting head of the U.S. Office of the Comptroller of the Currency (OCC) Michael Hsu has warned that the exotic financial products developed in some quarters of crypto and DeFi were reminiscent of those that precipitated the 2008 Global Financial Crisis (GFC).

Speaking before the Blockchain Association on Sept. 21, Hsu warned that “innovation for innovation’s sake [...] risks creating a mountain of fool’s good,” drawing analogies between the rapid proliferation of digital asset derivatives and the explosion in mortgage and debt derivatives such a Credit Default Swaps (CDS) that preceded the 2008 global financial crisis:

“I have seen one fool’s gold rush from up close in the lead up to the 2008 financial crisis. It feels like we may be on the cusp of another with cryptocurrencies (crypto) and decentralized finance (DeFi) [...] Crypto/DeFi today is on a path that looks similar to CDS in the early 2000s.”

Hsu notes that “it was nearly impossible to hedge the risk of a borrower defaulting” prior to the creation of CDS in the mid-1990s. However by the time he joined the SEC in 2004 the acting OCC head recounted that credit derivatives promised investors higher risk-adjusted returns using innovative products that “relied heavily on math and financial engineering."

“They believed they were leading a financial revolution, creating an entirely different asset class, using an entirely different set of models. Sound familiar? Today, programmers and coders, instead of quants and financial engineers, are the core innovators.”

Hsu asserts that by the time the crisis unfolded, the original mission of CDS “to create an instrument that could improve risk management and thus lower the cost of credit” had been “turned onto itself, cloaked in impenetrable math and jargon, and supercharged with yield and fees to ensure growth.”

Drawing parallels between exotic DeFi derivatives and the systemic risk that underpinned the collapse of the U.S. housing market in 2008, Hsu noted that “most innovation seems focused on enhancing trading” in crypto today rather than realizing the vision for greater financial autonomy articulated by Satoshi Nakamoto in the Bitcoin Whitepaper

Hsu cites several risks that could destabilize the crypto sector including “a run on a large stablecoin [...] forks, hacks, rug pulls, vampire attacks, and flash loans.” While acknowledging that crypto so far withstood all of the aforementioned incidents thus far, Hsu warns that such threats could loom larger as the cryptocurrency user base grows:

“My hypothesis is that until recently, most users have been hardcore believers in the technology and thus are both understanding of the risks and willing to forgive them. As the scope and reach of crypto/DeFi expands, though, more mainstream users, with regular expectations of safe and sound money, will dominate and drive reactions.”

Ultimately, Hsu’s outlook for crypto isn’t entirely bleak, with the official concluding that if the industry “applies the lessons from the 2008 crisis — anchor innovation in clear purpose, foster an environment for skeptics to speak up, and follow the money — the risks of fool’s gold can be mitigated and the real promise of blockchain innovation can be achieved.”

However, the days Hsu’s tenure heading the OCC appear numbered, with the Biden administration reportedly moving to nominate law professor Saule Omarova to lead the institution.

If nominated, analysts believe Omarova will oversee a tightening of regulations overseeing both the crypto and mainstream financial industries. Omarova previously described digital assets as a tool for private interests to abuse that are outside of regulatory purview.

Big investors pivoting from Bitcoin to Ether futures: JPMorgan

September 24, 2021 Coin Telegraph

BTC futures

Ether futures are currently trading at a premium as investors make the switch from Bitcoin-based products.

American multinational investment bank JPMorgan has revealed that institutional investors are starting to shy away from Bitcoin futures in favor of Ether derivatives.

In a note to investors on Sept. 22, analysts at the Wall Street bank said that Bitcoin futures on the Chicago Mercantile Exchange (CME) have traded at a discount compared to spot BTC prices during September.

As a consequence, Ethereum-based products have grown in popularity as investors made the switch to the world’s second-largest crypto asset. The analysts commented that there has been a “strong divergence in demand,” before adding:

“This is a setback for Bitcoin and a reflection of weak demand by institutional investors that tend to use regulated CME futures contracts to gain exposure to Bitcoin,”

When demand is high, BTC futures usually trade at a premium over the spot markets due to high BTC storage costs and enticing yields for passive crypto investing, the analysts added.

According to CME data, the 21-day average ETH futures premium rose to 1% over Ether prices on the spot markets. “This points to much healthier demand for Ethereum vs. Bitcoin by institutional investors,” commented the JPM analysts.

According to Skew Analytics, Binance is the industry leader for BTC futures volumes with $20 billion traded over the past 24 hours. OKEx is second with $5.36 billion and CME has just $2.34 billion traded over the past 24 hours by comparison. Binance also dominates for ETH futures with a daily volume of $9.7 billion.

Somewhat ironically JPM’s take on crypto futures emerged on the same day a motion was filed in a Manhattan federal court ordering JPMorgan to pay $16 million to Treasury futures investors for creating false demand, or “spoofing”. According to Law360, the move follows the bank’s $920 million criminal settlement with the U.S. Department of Justice in September 2020 for manipulating commodities futures markets.

In other institutional adoption news, two trust funds based on Bitcoin and Ethereum have been launched by California-based Cambrian Asset Management. The institutional investment products will offer exposure to the underlying assets but cut out some of the volatility according to Bloomberg.

The firm’s flagship crypto hedge fund, which trades 50 digital assets, has gained 76% this year through August, whereas BTC itself had gained 62% in the first 8 months of the year.

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

September 22, 2021 Coin Telegraph

basis

On Tuesday, SEC Chair Gary Gensler re-confirmed his plan to crack down on cryptocurrencies, and traders’ regulatory concerns are confirmed by this key Bitcoin futures and options indicator.

After 46 consecutive days of trading above $42,000, Bitcoin (BTC) price started to show weakness on Sept. 21. Over the last three days, the 13% accumulated loss was enough to erase the hard-earned gains added since Aug. 6. Historicals also show that the previous bearish cycle took 79 days to regain the all-important $42,000 level.

Traders' attention turned to the start of the U.S. Federal Reserve's monetary meeting, where the financial authority is expected to indicate whether it will curtail the $120 billion monthly asset repurchase stimulus program. Curiously, as all this takes place, China's equity markets, as measured by the iShares MSCI China ETF ($MCHI), rebounded 1% on Sept. 21.

Is China really the root of the recent correction?

The apparent disconnection between Bitcoin's performance and the global markets' slight recovery caused investors to question whether cryptocurrency regulation is playing a role in the current bearish scenario.

Today U.S. Securities and Commission (SEC) Chair Gary Gensler spoke to the Washington Post, and during the interview, he called stablecoins instruments for use at the "casino gaming tables."

Groan. The US regulatory clampdown on crypto which has been brewing the past six months just looks like it’s going to get uglier & uglier with each passing week. Not even sure what impact it’s going to have on the markets, but there sure isn’t much to be optimistic about rn.
— Grant Gulovsen, Esq. (@gulovsen) September 19, 2021

As noted by the attorney Grant Gulovsen, the looming shadow of regulation is expected to have a short-term bearish impact, and investors in any market hate uncertainties regarding what products and services will be allowed.

*Bitcoin price in USD at Coinbase. Source: TradingView*

Notice how the $42,000 level was crucial in determining the end of the mini-bear cycle that was supposedly initiated by Elon Musk's remarks on Bitcoin mining energy use on May 12.

To effectively measure how professional traders are pricing the risk of the further price collapse, investors should monitor the 25% delta skew, which compares similar call (buy) and put (sell) options side-by-side. It will turn positive when the protective put options premium is higher than similar risk call options.

A skew indicator oscillating between -7% and +7% is usually deemed neutral. On the other hand, the metric shifts above this range whenever the downside protection is more costly, typically a "fear" indicator.

*Deribit Bitcoin options 25% delta skew. Source: Laevitas*

As shown above, Bitcoin options traders have been neutral since July 25, when the indicator dropped below the 7% threshold. However, the recent price action caused shorter-term options traders to enter "fear" mode after the metric reached 9%.

Options markets confirm investors' lack of conviction

To exclude externalities specific to this options instrument, one should also analyze the perpetual futures markets.

Unlike regular monthly contracts, perpetual futures prices are very similar to those at regular spot exchanges. This feature makes retail traders' lives a lot easier because they no longer need to calculate the futures premium or manually roll over positions near expiry.

The funding rate was introduced to balance the exchange's exposure and it is charged from longs (buyers) when they are demanding more leverage. However, when the situation is reversed and shorts (sellers) are over-leveraged, the funding rate goes negative, so they become the ones paying the fee.

*Bitcoin 8-hour USDT/USD margin futures funding rate. Source: Bybt*

The chart above shows that Bitcoin's funding rate has constantly shifted to the negative side, despite not being sustainable or relevant. For example, a 0.05% rate charged every 8 hours is equivalent to 1% per week, which shouldn't force any derivatives trader to close their position.

Therefore, options markets data validates the "fear" indicator coming from the positive 25% delta options skew. There is a lack of conviction from buyers using derivatives markets, which is likely related to the recent negative regulatory concerns. The latest victim to regulatory pressure came from Coinbase exchange's decision to avert plans for offering a crypto lending program.

Binance Axes Derivatives Trading in Australia

September 21, 2021 The Crypto Briefing

derivatives

Bulls placed more bets, but there's a catch

Bulls are wrecked one way or another

Pro traders are neutral, but fear is starting to settle in

Is Solana's outage weighing on SOL price?

Derivatives markets point toward a balanced situation

Pro traders showed some doubt but remained neutral

Option markets confirm traders are entering the “fear” zone

Is China really the root of the recent correction?

Options markets confirm investors' lack of conviction

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