Bitcoin traders have experienced a period of relative stability over the past few months, with the cryptocurrency seeing less volatility. However, history shows that price swings of 10% in just a couple of days are not uncommon in the Bitcoin market. The recent 11.4% correction from $29,340 to $25,980 between August 15 and August 18 caught many off guard and resulted in the largest liquidation since the FTX collapse in November 2022. The question on everyone’s mind now is whether this correction holds any significance in terms of the market structure.
Some experts attribute the recent spikes in volatility to reduced liquidity. They suggest that market makers may have adjusted their algorithms to align with the prevailing market conditions. To determine the impact of the drop to $26,000, it is necessary to delve into the derivatives market. This examination aims to uncover whether whales and market makers have become bearish or if they are demanding higher premiums for protective hedge positions.
To gain insights, it is helpful to look at similar instances in the recent past. Two events stand out: the price decline from March 8 to March 10, which caused Bitcoin to plummet by 11.4% to $19,600, and the subsequent drop between April 19 and April 21, resulting in a 10.4% decrease in Bitcoin’s price. The first correction followed the liquidation of Silvergate Bank, a crucial operational partner for multiple cryptocurrency firms. The second correction occurred after Gary Gensler, the chair of the United States Securities and Exchange Commission, addressed the House Financial Services Committee, providing little reassurance about the agency’s enforcement-driven regulatory efforts.
One important factor to consider is the premium of Bitcoin quarterly futures compared to spot markets. Traditionally, BTC futures contracts trade at a slight premium, reflecting sellers’ desire for additional compensation in exchange for delaying settlement. Healthy markets usually see futures contracts with an annualized premium ranging from 5% to 10%. This situation, known as “contango,” is not unique to the cryptocurrency domain.
In the case of the March 8 correction, Bitcoin’s futures premium was at 3.5%, indicating a moderate level of comfort. However, when Bitcoin’s price dipped below $20,000, there was a shift to a discount of 3.5%, signaling bearish market conditions. On the other hand, the April 19 correction had minimal impact on Bitcoin’s futures premium, with the indicator remaining around 3.5%.
The recent 11.4% Bitcoin crash between August 15 and August 18 displayed distinct differences from previous instances. The starting point for Bitcoin’s futures premium was already higher, surpassing the 5% neutral threshold. Interestingly, the derivatives market absorbed the shock quickly, as the BTC futures premium swiftly returned to a 6% neutral-to-bullish position. This suggests that the decline to $26,000 did not significantly dampen the optimism of whales and market makers.
Analyzing options markets can further confirm whether the recent correction has made professional traders more risk-averse. By looking at the delta skew metric, which measures the deviation in options prices, traders can gauge market sentiment. A delta skew above 7% indicates anticipation of a Bitcoin price drop, while a -7% skew implies excitement and optimism.
Prior to the August 15 crash, data showed excessive demand for call (buy) BTC options, with the indicator at -11%. Although this trend shifted over the following days, the metric remained within the neutral range and did not breach the 7% threshold. This suggests that professional traders have not adopted a bearish stance.
In conclusion, both Bitcoin options and futures metrics indicate that professional traders are not bearish on the cryptocurrency. While this does not guarantee an immediate return of Bitcoin to the $29,000 support level, it does reduce the likelihood of an extended price correction. It is important to note that the views expressed in this analysis are solely the author’s and should not be taken as legal or investment advice.
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