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 futures backwardation hints at 30% ‘airdrop rally’ ahead of the Merge

August 1, 2022 Coin Telegraph

Coin Telegraph

Backwardation reflects a market condition wherein spot prices trade higher than future prices.

Ether (ETH) bulls like a positive spread between its spot and ETH futures prices because the so-called contango reflects optimism about a higher rate in the future. But as of Aug. 1, the Ethereum futures curve slid in the opposite direction.

Ethereum quarterly futures in backwardation

On the daily chart, Ethereum futures quarterly contracts, scheduled to expire in December 2022, have slipped into backwardation, a condition opposite to contango, wherein the futures price becomes lower than the spot price.

The spread between Ethereum's spot and futures price grew to -$8 on Aug. 1.

*ETH230-ETHUSD daily price chart. Source: TradingView*

One one hand, the current ETH spot price being higher than its year-end outlook appears like a bearish sign. However, the conditions surrounding the current negative spread between the Ether spot and futures price suggests traders may actually be bullish on ETH.

For instance, Bitcoin (BTC) has gained 15% since its futures entered backwardation in late June for the first time in a year.

ETH could rally on "airdrop" hopes

Moreover, a potential chain split will likely be bullish in the run-up to the Merge in September, according to some analysts.

Roshun Patel, former vice president of institutional lending at Genesis Trading, noted that the December Ether futures have flipped into backwardation due to Ethereum "fork odds," which could prompt traders to buy spot ETH ahead of the Merge.

Meanwhile, Patel hinted that traders could be offsetting their upside spot risks by taking bearish positions on December futures contracts.

dec flipping into backwardation on eth starting to price in fork odds. Back in 2020 the play with the bchabc fork was buy spot and short the quarts pic.twitter.com/Oyde1htnz8
— Roshun Patel (@roshunpatel) July 31, 2022

The statement came after Galois Capital's survey on the Merge . In the July 28 Twitter poll, the crypto hedge fund asked its followers whether or not the Merge would end up splitting the Ethereum chain into the proof-of-work (PoW) ETH1 and a proof-of-stake (PoS) ETH2.

Of the respondents, 33.1% said ththe upgrade would lead to a hard fork, while 53.7% anticipated a smooth network transition.

Question 1: What happens during the merge? If Choice 2 or 3 go to Questions 2-5.
— Galois Capital (@Galois_Capital) July 27, 2022

Ethereum's potential chain split means that ETH holders will have an equal amount of tokens on both chains. In other words, an airdrop that grants ETH holders the same amount of ETH1 tokens, a la Ethereum Classic (ETC) in 2016.

ETH price technicals flash "golden cross"

Ether now consolidates inside a key $1,650–$1,750 resistance bar that served as support during the May–June 2022 session.

Meanwhile, the token's 20-day (green) and 50-day (red) exponential moving averages (EMA) have also formed a "golden cross," suggesting an interim bullish outlook.

*ETH/USD daily price chart. Source: TradingView*

A breakout emerging from the $1,650–$1,750 resistance bar could have ETH eye $2,150 as its next upside target. This level was instrumental as resistance in May and June and support in January. It now coincides with the 200-day EMA (the blue wave) near $2,180, up almost 30% from August 1's price.

Conversely, a pullback from the resistance bar could expose ETH toward the 20-day EMA (~$15,250) and the 50-day EMA ($1,500) waves.

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.

Ethereum options data show pro traders ready to go long into ETH’s Merge

July 27, 2022 Coin Telegraph

apecoin

ETH price hit resistance at the $1,600 level, but this is not stopping options traders from opening fresh leveraged longs.

Ether (ETH) is down 11.5% in seven days even after the recent confirmation of the "Ethereum merge" transition to a proof-of-stake (PoS) consensus network in September. During the Ethereum core developers conference call on July 14, developer Tim Beiko proposed Sept. 19 as the tentative target date.

The transition out of energy-intensive mining has been delayed for years, and the journey toward scalability using sharding technology — parallel processing capability — is yet to be scheduled. Still, some analysts expect the network’s monetary policy to boost the value of Ether.

Ethereum researcher Vivek Raman highlighted the effect of the "supply shock" and according to the analyst, the "merge" will "reduce ETH's total supply by 90%," even though no benefit in transaction fees is to be seen in the current transition stage.

Regulatory uncertainty could be partially responsible for Ether's recent sharp correction. A class-action has been proposed against Yuga Labs for "inappropriately inducing" the community to buy nonfungible tokens (NFTs) and the ApeCoin (APE) token. Furthermore, the law firm claims that Yuga Labs used celebrity promoters and endorsements to "inflate the price" of the BAYC NFTs and the APE tokens.

Moreover, on July 26, Infrawatch PH, a think tank in the Philippines, filed a complaint to the local regulator to crack down on Binance's activities and alleged unregistered operations . The petition claims that the exchange has no office in Manila and only uses "third-party companies" for its technical and customer support services.

Options traders are nowhere near optimistic

Investors should look at Ether's derivatives markets data to understand how whales and arbitrage desks are positioned. The 25% delta skew is a telling sign whenever traders overcharge for upside or downside protection.

If those market participants feared an Ether price crash, the skew indicator would move above 10%. On the other hand, generalized excitement reflects a negative 10% skew.

*Ether 30-day options 25% delta skew: Source: Laevitas.ch*

The skew indicator exited the "fear" zone on July 16 as Ether broke above $1,300, its highest level in 33 days. However, the improvement in traders' sentiment was not enough to instill confidence as the metric has since remained at the "neutral" threshold. ETH option traders are currently assessing similar upside and downside price movement risks.

Long-to-short data show a modest improvement in sentiment

The top traders' long-to-short net ratio excludes externalities that might have solely impacted the options markets. This metric gathers data from exchange clients' positions on the spot, perpetual and quarterly futures contracts, thus better informing on how professional traders are positioned.

There are occasional methodological discrepancies between different exchanges, so readers should monitor changes instead of absolute figures.

*Exchanges' top traders Ether long-to-short ratio. Source: Coinglass*

Even though Ether has failed to break the $1,600 resistance, professional traders did not reduce their leverage long positions between July 19 and 26, according to the long-to-short indicator.

Binance traders long-to-short ratio failed to hold the 1.13 mark but finished the period at the same level it started, near 1.05. Huobi displayed a modest decrease in its long-to-short ratio, as the indicator moved from 1.02 to the current 0.98 in seven days.

However, at the OKX exchange, the metric drastically increased within the period, from 0.88 on July 19 to the present 1.37. Thus, on average, traders increased their bullish positions in seven days.

There hasn't been a significant change in whales and market makers' leverage positions despite Ether's 11.5% correction since July 19. Furthermore, options traders are pricing similar risks for Ether's upside and downside moves, while leverage futures players slightly increased their bullish bets. The overall derivatives metrics reading is positive even though ETH failed to break the $1,600 resistance.

Fed policy and crumbling market sentiment could send the total crypto market cap back under $1T

July 25, 2022 Coin Telegraph

Fed policy and crumbling market sentiment could send the total crypto market cap back under T

Asia

Data shows investors jumping back into fiat and a lack of bullish leverage in the crypto market suggests another correction is in the making.

The total crypto market capitalization broke above $1 trillion on July 18 after an agonizing thirty-five-day stint below the key psychological level. Over the next seven days, Bitcoin (BTC) traded flat near $22,400 and Ether (ETH) faced a 0.5% correction to $1,560.

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

The total crypto capitalization closed July 24 at $1.03 trillion, a modest 0.5% negative seven-day movement. The apparent stability is biased toward the flat performance of BTC and Ether and the $150 billion value of stablecoins. The broader data hides the fact that seven out of the top-80 coins dropped 9% or more in the period.

Even though the chart shows support at the $1 trillion level, it will take some time until investors regain confidence to invest in cryptocurrencies and actions from the United States Federal Reserve could have the largest impact on price action.

Furthermore, the sit and wait mentality could be a reflection of important macroeconomic events scheduled for the week ahead. Broadly speaking, worse than expected data tends to increase investors' expectations of expansionary measures, which are beneficial for riskier assets like cryptocurrency.

The Federal Reserve policy meeting is scheduled for July 26 and 27, and investors expect the United States central bank to raise interest rates by 75 basis points. Moreover, the second quarter of U.S. gross domestic product (GDP) – the broadest measure of economic activity — will be released on July 27.

$1 trillion not enough to instill confidence

Investors sentiment improved from July 18, as reflected in the Fear and Greed Index, a data-driven sentiment gauge. The indicator currently holds 30 out of 100, which is an increase from 20 on July 18 when it hovered in the "extreme fear" zone.

*Crypto Fear and Greed Index. Source: alternative.me*

One must note that even though the $1 trillion total crypto market capitalization was recaptured, traders' spirits have not improved much. Listed below are the winners and losers from July 17 to 24.

*Weekly winners and losers among the top 80 coins. Source: Nomics*

Arweave (AR) faced a 20.6% technical correction after an impressive 58% rally from July 12–18 after the network file-sharing solution surpassed 80 terabytes (TB) of data storage.

Polygon (MATIC) moved down 11.7% after Ethereum co-founder Vitalik Buterin supported the zero-knowledge Rollups technology implementation, a feature currently in the works for Polygon.

Solana (SOL) corrected 9% after the demand for the smart contract network could be negatively impacted by Ethereum's upcoming migration to a proof-of-stake consensus.

Retail traders are not interested in bullish positions

The OKX Tether (USDT) premium is a good gauge of China-based retail crypto trader demand. It measures the difference between China-based peer-to-peer (P2P) trades and the United States dollar.

Excessive buying demand tends to pressure the indicator above fair value at 100%, and during bearish markets, Tether's market offer is flooded and causes a 4% or higher discount.

*Tether (USDT) peer-to-peer vs. USD/CNY. Source: OKX*

Tether has been trading with a slight discount in Asian peer-to-peer markets since July 4. Not even the 25% total market capitalization rally durinJuly 13–20 was enough to display excessive buying demand from retail traders. For this reason, these investors continued to abandon the crypto market by seeking shelter in fiat currency.

One should analyze crypto derivatives metrics to exclude externalities specific to the stablecoin market. For instance, perpetual contracts have an embedded rate that is usually charged every eight hours. Exchanges use this fee to avoid exchange risk imbalances.

A positive funding rate indicates that longs (buyers) demand more leverage. However, the opposite situation occurs when shorts (sellers) require additional leverage, causing the funding rate to turn negative.

*Accumulated perpetual futures funding rate on July 24. Source: Coinglass*

The derivatives contracts show modest demand for leveraged long (bull) positions on Bitcoin, Ether and Cardano. Still, nothing is out of the norm after a 0.15% weekly funding equals a 0.6% monthly cost, so uneventful. The opposite movement happened on Solana, XRP and Ether Classic (ETC), but it is not enough to raise concern.

As investors' attention shifts to global macroeconomic data and the Fed's response to weakening conditions, the window of opportunity for the cryptocurrencies to prove themselves as a solid alternative gets smaller.

Crypto traders are signaling fear and a lack of leverage buying, even in the face of a 67% correction since the November 2021 peak. Overall, derivatives and stablecoin data show a lack of confidence in $1 trillion market capitalization support.

Pro Bitcoin traders are uncomfortable with bullish positions

July 22, 2022 Coin Telegraph

China

BTC derivatives used by whales and market makers do not support a continuous price recovery above $24,000.

The previous $19,000 Bitcoin (BTC) support level becomes more distant after the 22.5% gain in nine days. However, little optimism has been instilled as the impact of the Three Arrows Capital (3AC), Voyager, Babel Finance and Celsius crises remain uncertain. Moreover, the contagion has claimed yet another victim after Thai crypto exchange Zipmex halted withdrawals on July 20.

*Bitcoin/USD 1-day price. Source: TradingView*

Bulls' hopes depend on the $23,000 support strengthening as time goes by, but derivatives metrics show professional traders are still highly skeptical of continuous recovery.

Macroeconomic headwinds favor scarce assets

Some analysts attribute the crypto market strength to China’s lower-than-expected gross domestic product data, causing investors to expect further expansionary measures by policymakers. China’s economy expanded 0.4% in the second quarter versus the previous year, as the country continued to struggle with self-imposed restrictions to curb another outbreak of COVID-19 infections, according to CNBC.

The United Kingdom's 9.4% inflation in June marked a 40-year high, and to supposedly aid the population, Chancellor of the Exchequer Nadhim Zahawi announced a $44.5 billion (GBP 37 billion) assistance package for vulnerable families.

Under these circumstances, Bitcoin reversed its downtrend as policymakers scrambled to solve the seemingly impossible problem of slowing economies amid ever-increasing government debt.

However, the cryptocurrency sector faces its own issues, including regulatory uncertainties. For instance, on July 21, the United States Securities and Exchange Commission (SEC) labeled nine tokens as "crypto asset securities," thus not only falling under the regulatory body's purview but liable for having failed to register with it.

Expressly, the SEC referred to Powerledger (POWR), Kromatika (KROM), DFX Finance (DFX), Amp (AMP), Rally (RLY), Rari Governance Token (RGT), DerivaDAO (DDX), LCX, and XYO. The regulator brought charges against a former Coinbase product manager for "insider trading" after they allegedly used non-public information for personal benefit.

Currently, Bitcoin investors face too much uncertainty despite the seemingly helpful macroeconomic backdrop, which should favor scarce assets such as BTC. For this reason, an analysis of derivatives data is valuable in understanding whether investors are pricing higher odds of a downturn.

Pro traders remain skeptical of price recovery

Retail traders usually avoid quarterly futures due to their price difference from spot markets. Still, they are professional traders' preferred instruments because they prevent the perpetual fluctuation of contracts' funding rates.

These fixed-month contracts usually trade at a slight premium to spot markets because investors demand more money to withhold the settlement. But this situation is not exclusive to crypto markets, so futures should trade at a 4% to 10% annualized premium in healthy markets.

The Bitcoin's futures premium flirted with the negative area in mid-June, something is typically seen during extremely bearish periods. The mere 1% basis rate, or annualized premium, reflects professional traders' unwillingness to create leverage long (bull) positions. Investors remain skeptical of the price recovery despite the low cost of opening a bullish trade.

One must also analyze the Bitcoin options markets to exclude externalities specific to the futures instrument. For example, the 25% delta skew is a telling sign when market makers and arbitrage desks are overcharging for upside or downside protection.

In bear markets, options investors give higher odds for a price dump, causing the skew indicator to rise above 12%, while the opposite holds true during bullish markets.

The 30-day delta skew peaked at 21% on July 14 as Bitcoin struggled to break the $20,000 resistance. The higher the indicator, the less inclined options traders are to offer downside protection.

More recently, the indicator moved below the 12% threshold, entering a neutral area, and no longer sitting at the levels reflecting extreme aversion. Consequently, options markets currently display a balanced risk assessment between a bull run and another re-test of the $20,000 area.

Some metrics suggest that the Bitcoin cycle bottom is behind us, but until traders have a better view of the regulatory outlook and centralized crypto service providers' liquidity as the Three Arrows Capital crisis unfolds, the odds of breaking above $24,000 remain uncertain.

Bitcoin derivatives data suggests bears will pin BTC below $21K leading in Friday’s options expiry

July 14, 2022 Coin Telegraph

Bitcoin derivatives data suggests bears will pin BTC below K leading in Friday’s options expiry

CME

Bitcoin’s failure to break above $22,000 on July 8 opened room for bears to score a $100 million profit in this week’s options expiry.

Most Bitcoin (BTC) traders would rather see a sharp price correction and a subsequent recovery than agonize for multiple months below $24,000. However, BTC has been doing the opposite since June 14 and its most recent struggle is the asset’s failure to break above the $22,000 resistance. For this reason, most traders are holding back their bullish expectations until BTC posts a daily close above $24,000.

Events outside of the crypto market are the primary factor impacting investors' perspectives on digital assets and on July 14, United States Treasury Secretary Janet Yellen warned that inflation is "unacceptably high" and she reinforced the support of the Federal Reserve’s efforts. When questioned about the impact of rising interest rates on the economy, Yellen recognized the risk of a recession.

On the same day, JPMorgan Chase reported a 28% decline in profits versus the previous year despite recording stable revenues. The difference comes chiefly from a $1.1 billion provision for credit losses because of a "modest deterioration" in its economic outlook.

Bitcoin’s correlation to the S&P 500 remains incredibly high and investors fear that a potential crisis in the global financial sector will inevitably lead to a retest of the $17,600 low from June 18.

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

The S&P 500 and Bitcoin 30-day correlation presently stands at 0.87, which has been the norm for the past four months.

Most bullish bets are above $21,000

Bitcoin's failure to break above $22,000 on July 8 took bulls by surprise because only 2% of the call (buy) options for July 15 have been placed below $20,000. Thus, Bitcoin bears are slightly better positioned for the $250 million weekly options expiry.

*Bitcoin options aggregate open interest for July 15. Source: CoinGlass*

A broader view using the 1.15 call-to-put ratio shows more bullish bets because the call (buy) open interest stands at $134 million against the $116 million put (sell) options. Nevertheless, as Bitcoin currently stands below $21,000, most bullish bets will likely become worthless.

If Bitcoin's price remains below $21,000 at 8:00 am UTC on July 15, only $25 million worth of these calls (buy) options will be available. This difference happens because there is no use in the right to buy Bitcoin at $21,000 if it trades below that level on expiry.

Bears could pocket a $100 million profit

Below are the three most likely scenarios based on the current price action. The number

of options contracts available on July 15 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

Between $18,000 and $19,000: 10 calls vs. 5,200 puts. The net result favors bears by $100 million.
Between $19,000 and $20,000: 200 calls vs. 3,400 puts. The net result gives bears a $60 million advantage
Between $20,000 and $21,000: 1,300 calls vs. 1,700 puts. The net result is balanced between bulls and bears.

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.

Futures markets show bears are better positioned

Bitcoin bears need to pressure the price below $19,000 on July 15 in order to secure a $100 million profit. On the other hand, the bulls' best-case scenario requires a push above $20,000 to balance the scales.

The lack of appetite from professional traders in the Bitcoin CME futures indicates that bulls are less inclined to push the price higher in the short term.

With that said, the most probable scenario favors bears, and to secure this Bitcoin price only needs to trade below $21,000 going into the July 15 options expiry.

How Bitcoin’s strong correlation to stocks could trigger a drop to $8,000

July 13, 2022 Coin Telegraph

How Bitcoin’s strong correlation to stocks could trigger a drop to ,000

CME

The absence of a CME Bitcoin futures premium, unrelenting record-high inflation and investor concerns over the economy are all factors weighing on BTC price.

The Bitcoin (BTC) price chart from the past couple of months reflects nothing more than a bearish outlook and it’s no secret that the cryptocurrency has consistently made lower lows since breaching $48,000 in late March.

*Bitcoin price in USD. Source: TradingView*

Curiously, the difference in support levels has been getting wider as the correction continues to drain investor confidence and risk appetite. For example, the latest $19,000 baseline is almost $10,000 away from the previous support. So if the same movement is bound to happen, the next logical price level would be $8,000.

Traders are afraid of regulation and contagion

On July 11, the Financial Stability Board (FSB), a global financial regulator including all G20 countries, announced that a framework of recommendations for the crypto sector is expected in October. The FSB added that international regulators need to supervise crypto markets in line with the principle of “same activity, same risk, same regulation.”

In a written speech on July 12, Jon Cunliffe, deputy governor for financial stability at the Bank of England, said that crypto is somehow over and it should not be a concern anymore. Cunliffe added: “innovation has to happen within a framework in which risks are managed.”

To date, investors still haven’t figured out the total losses from deposits on crypto lenders Celsius and Voyager Digital, and both firms continue to seek either a recovery plan or bankruptcy. According to Voyager, the firm still holds $650 million worth of “claims against Three Arrows Capital,” so the exact numbers of customer assets remain unknown.

The negative newsflow is reflected in the CME’s Bitcoin futures contracts premium. This data measures the difference between longer-term futures contracts and the current spot prices in regular markets.

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

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

These fixed-month contracts usually trade at a slight premium, indicating that sellers are requesting more money to withhold settlement for longer. As a result, futures should trade at a 0.25%–0.75% premium in healthy markets, a situation known as contango.

Notice how the indicator has stood below the “neutral” range since early April, since Bitcoin failed to sustain levels above $45,000. The data shows that institutional traders are unwilling to open leverage long positions, although it is not yet a bearish structure.

Macroeconomic fears are preventing investors from trading crypto

Exchange-provided data highlights traders’ long-to-short net positioning. By analyzing every client’s position on the spot, perpetual and futures contracts, one can better understand whether professional traders are leaning bullish or bearish.

There are occasional discrepancies in the methodologies between different exchanges, so viewers should monitor changes instead of absolute figures.

*Exchanges top traders Bitcoin long-to-short ratio. Source: Coinglass*

Despite Bitcoin’s 11% correction from July 9 to July 12, top traders have increased their leverage longs. The long-to-short ratio at Binance remained relatively flat at 1.13, while the top traders at Huobi started at 0.95 and finished the period at 0.93. However, this impact was more than compensated by OKX traders increasing their bullish bets from 1.09 to 1.32.

The lack of a premium in the CME futures contract is not concerning because Bitcoin is struggling with the $20,000 resistance. Furthermore, top traders on derivatives exchanges have increased their longs despite the 11% price drop in three days.

Regulatory pressure is unlikely to recede in the short term and at the same time, there’s not much that the Federal Reserve can do to suppress inflation without triggering some form of an economic crisis. For this reason, pro traders are not rushing to buy the dip because Bitcoin’s correlation to traditional assets remains high.

3 key metrics suggest Bitcoin and the wider crypto market have further to fall

July 12, 2022 Coin Telegraph

Aave

Traders are not as fearful as they were in June, but several metrics show the market is still standing on paper-thin support levels.

The total crypto market capitalization has fluctuated in a 17% range in the $840 billion to $980 billion zone for the past 28 days. The price movement is relatively tight considering the extreme uncertainties surrounding the recent market sell-off catalysts and the controversy surrounding Three Arrows Capital.

From July 4 to 11, Bitcoin (BTC) gained a modest 1.8% while Ether (ETH) price stood flat. More importantly, the total crypto market is down 50% in just three months, which means traders are giving higher odds of the descending triangle formation breaking below its $840 billion support.

#Bitcoin Bottom scenario :

Since #BTC downtrend from its peak $BTC has farming the same Decending triangle pattern every time, but each triangle is becoming smaller

We might see another breakdown from triangle & 400WMA can be bottom #Crypto #cryptocurrencies #cryptocurrency https://t.co/BsXBAJHa4P pic.twitter.com/oAQ0IX5XgU
— Aditya Siddhartha Roy❁ (@Adityaroypspk) July 7, 2022

Regulation uncertainties continue to weigh down investor sentiment after the European Central Bank (ECB) released a report concluding that a lack of regulatory oversight added to the recent downfall of algorithmic stablecoins. As a result, the ECB recommended supervisory and regulatory measures to contain the potential impact of stablecoins in European countries' financial systems.

On July 5, Jon Cunliffe, the deputy governor for financial stability at the Bank of England (BoE) recommended a set of regulations to tackle the cryptocurrency ecosystem risks. Cunliffe called for a regulatory framework similar to traditional finance to shelter investors from unrecoverable losses.

A few mid-cap altcoins rallied and sentiment slightly improved

The bearish sentiment from late June dissipated according to the Fear and Greed Index, a data-driven sentiment gauge. The indicator reached a record low of 6/100 on June 19 but improved to 22/100 on July 11 as investors began to build the confidence in a market cycle bottom.

*Crypto Fear & Greed Index. Source: Alternative.me*

Below are the winners and losers from the past seven days. Notice that a handful of mid-capitalization altcoins rallied 13% or higher even though the total market capitalization increased by 2%.

Aave (AAVE) gained 20% as the lending protocol announced plans to launch an algorithmic stablecoin, a proposal that is subject to the community's decentralized autonomous organization .

Polygon (MATIC) rallied 18% after projects formerly running in the Terra (LUNA) — now called Terra Classic (LUNC) — ecosystem started to migrate over to Polygon.

Chiliz (CHZ) hiked 6% after the Socios.com app announced community-related features to boost user engagement and integration with third-party approved developers.

Asia-based flow and derivatives demand is neutral and balanced

The OKX Tether (USDT) premium measures the difference between China-based peer-to-peer trades and the official U.S. dollar currency. Excessive cryptocurrency retail demand pressures the indicator above fair value at 100%. On the other hand, bearish markets likely flood Tether's market offer, causing a 4% or higher discount.

Tether has been trading at a 1% or higher discount in Asian peer-to-peer markets since July 4. The indicator failed to display a sentiment improvement on July 8 as the total crypto market capitalization flirted with $980 billion, the highest level in 24 days.

To confirm whether the lack of excitement is confined to the stablecoin flow, one should analyze futures markets. Perpetual contracts, also known as inverse swaps, have an embedded rate that is usually charged every eight hours. Exchanges use this fee to avoid exchange risk imbalances.

*Accumulated perpetual futures funding rate on July 11. Source: Coinglass*

Perpetual contracts reflected a neutral sentiment as Bitcoin (BTC), Ethereum (ETH) and Ripple (XRP) displayed mixed funding rates. Some exchanges presented a slightly negative (bearish) funding rate, but it is far from punitive. The only exception was Polkadot's (DOT) negative 0.35% weekly rate (equal to 1.5% per month), but this is not especially concerning for most traders.

Considering the lack of buying appetite from Asia-based retail markets and the absence of leveraged futures demand, traders can conclude that the market is not comfortable betting that the $840 billion total market cap support level will hold.

Bitcoin traders expect a ‘generational bottom,’ but BTC derivatives data disagrees

July 7, 2022 Coin Telegraph

3AC

BTC bulls think the bottom is in, but a neutral-to-bearish price formation and the absence of a futures premium contradict their optimism.

A descending triangle pattern has been pressuring Bitcoin (BTC) for the past three weeks and while some traders cite this as a bullish reversal pattern, the $19,000 support remains a crucial level to determine the bulls' fate.

*BTC-USD 12-hour price. Source: TradingView*

Despite the apparent lack of a clear price bottom, Bitcoin derivatives metrics have significantly improved since June 30 and positive news from global asset manager VanEck may have eased traders' sentiment.

On July 5, two retirement funds in the U.S. state of Virginia announced a $35 million commitment to VanEck's cryptocurrency-focused investment fund.

On the same day, a Huobi exchange subsidiary received its money services business (MSB) license from the United States Financial Crimes Enforcement Network (FinCEN). The Seychelles-based company stated that the license creates a foundation for expanding crypto-related business in the United States.

A bit of positive news came out on July 7 as decentralized finance staking and lending platform Celsius Network announced that it had fully repaid its outstanding debt to Maker (MKR) protocol.

Celsius is among several crypto yield platforms on the brink of insolvency after historic losses across multiple positions. Forced sales on leveraged positions by exchanges and decentralized finance (DeFi) applications accelerated the recent cryptocurrency price crash.

Currently, traders face mixed sentiment between possible contagion impacts and their optimism that the $19,000 support is gaining strength. For this reason, analyzing derivatives data is essential to understand whether investors are pricing higher odds of a market downturn.

Bitcoin futures premium flips slightly positive

Retail traders usually avoid quarterly futures due to their fixed settlement date and price difference from spot markets. However, the contracts' biggest advantage is the lack of a fluctuating funding rate; hence, the prevalence of arbitrage desks and professional traders.

These fixed-month contracts tend to trade at a slight premium to spot markets as sellers request more money to withhold settlement longer. This situation is technically known as "contango" and is not exclusive to crypto markets. Thus, futures should trade at a 5% to 10% annualized premium in healthy markets.

Bitcoin annualized futures' premium went negative on June 28, indicating low demand from leverage buyers. Yet, the bearish structure did not hold for long as the indicator shifted to the positive area on July 4.

Option traders remain skeptical of each price pump

To exclude externalities specific to the Bitcoin futures instrument, traders must also analyze the options markets. For instance, the 25% delta skew shows when arbitrage desks are overcharging for upside or downside protection.

Options traders give higher odds for a price increase during bullish markets, causing the skew indicator to fall below -12%. Meanwhile, a market's generalized fear sentiment induces a 12% or higher positive skew.

June 18 marked the highest-ever record 30-day delta skew, typical of extremely bearish markets. Still, the current 16% skew level shows investors' reluctance to provide downside protection, a fact reflected by the overcharging for put options.

Contagion is still a threat that adds pressure across the market

It’s tough to call whether $17,580 was the cycle low, but some traders attribute the movement to Three Arrows Capital's failure to meet its margin calls.

Some traders are calling for a "generational bottom," but there is still a long way before investors flip bullish as Bitcoin remains locked in a descending triangle formation.

3AC got liquidated at the generational bottom, send everything into super cycle with haste
— hentaiavenger66 (@hentaiavenger66) July 6, 2022

From one side, Bitcoin derivatives metrics show modest improvement since June 30. On the other hand, investors remain suspicious of further contagion from such an important venture capital and crypto asset manager.

Sometimes the best trade is to wait for a clearer market structure and avoid leverage at all costs, regardless of your certainty of a cycle bottom.

Bitcoin’s short-term price prospects slightly improved, but most traders are far from optimistic

June 27, 2022 Coin Telegraph

China

Bitcoin’s derivatives metrics reflect slight improvements since the $17,600 low, but whales and market makers continue to price higher risk of another breakdown.

A mild sense of hope emerged among Bitcoin (BTC) investors after the June 18 drop to $17,600 becomes more distant and an early ascending pattern points toward $21,000 in the short-term.

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

Recent negative remarks from lawmakers continued to curb investor optimism. In an interview with Cointelegraph, Swiss National Bank (SNB) deputy head Thomas Muser said that the decentralized finance (DeFi) ecosystem would cease to exist if current financial regulations are implemented in the crypto industry.

An article published in The People's Daily on June 26 mentioned the Terra (LUNA), now renamed Terra Classic (LUNC), network's collapse and local blockchain expert Yifan He referring to crypto as a Ponzi scheme. When asked by Cointelegraph to clarify the statement on June 27, Yifan He stated that "all unregulated cryptocurrencies including Bitcoin are Ponzi schemes based on my understanding."

On June 24, Sopnendu Mohanty the chief fintech officer of the Monetary Authority of Singapore (MAS) pledged to be "brutal and unrelentingly hard" on any "bad behavior" from the cryptocurrency industry.

Ultimately, Bitcoin investors face mixed sentiment as some think the bottom is in and $20,000 is support. Meanwhile, others fear the impact that a global recession could have on risk assets. For this reason, traders should analyze derivatives markets data to understand if traders are pricing higher odds of a downturn.

Bitcoin futures show a balanced force between buyers and sellers

Retail traders usually avoid monthly futures because their price differs from regular spot markets at Coinbase, Bitstamp and Kraken. Still, those are professional traders' preferred instruments as they avoid the funding rate fluctuation of the perpetual contracts.

These fixed-month contracts usually trade at a slight premium to spot markets because investors demand more money to withhold the settlement. Consequently, futures should trade at a 5% to 10% annualized premium in healthy markets. One should note that this feature is not exclusive to crypto markets.

Whenever this indicator fades or turns negative, this is an alarming, bearish red flag signaling a situation known as backwardation. The fact that the average premium barely touched the negative area while Bitcoin traded down to $17,600 is remarkable.

Despite currently holding an extremely low futures premium (basis rate), the market has kept a balanced demand between leverage buyers and sellers.

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

During bearish markets, options investors give higher odds for a price crash, causing the skew indicator to rise above 12%. On the other hand, a market's generalized FOMO induces a negative 12% skew.

After peaking at 36% on June 18, the highest-ever record, the indicator receded to the current 15%. Options markets have shown an extreme risk-aversion until June 25, when the 25% delta skew finally broke below 18%.

The current 25% skew indicator continues to display higher risks of a downside from professional traders but it no longer sits at levels that reflecti extreme risk aversion.

The bottom could be in according to on-chain data

Some metrics suggest that Bitcoin may have bottomed on June 18 after miners sold significant quantities of BTC. According to Cointelegraph, this indicates that capitulation has occurred already and Glassnode, an on-chain analysis firm, demonstrated that the Bitcoin Mayer Multiple fell below 0.5, which is extremely rare and hasn't happened since 2015.

Whales and arbitrage desks might take some time to adjust after key players like Three Arrows Capital face serious contraction and liquidation risks due to a lack of liquidity or excessive leverage. Until there's enough evidence that the contagion risk is alleviated, Bitcoin price probably continue to trade below $22,000.

futures