The premium for Bitcoin (BTC) futures has reached its highest level in 18 months, raising questions among traders about whether it signifies “excessive excitement” or a “return to the mean” after a prolonged bear market. BTC price has been trading within a narrow 4.4% range between $29,900 and $31,160 since June 22. This lack of a clear trend reflects the opposing drivers currently at play in the market.
One factor negatively affecting investor sentiment is the historic reversion of the U.S. Treasury yield curve, which reached its highest level on record. The closely monitored inverted spread between the 2-year and 10-year Treasury notes, currently standing at 1.09%, typically indicates economic recessions. On the other hand, signs of strength in the U.S. economy have led investors to expect further interest rate increases by the central bank to control inflation.
In addition to these macroeconomic factors, cryptocurrency regulation has also been in the spotlight. Recent examples include the U.S. District Court requiring Kraken exchange to disclose details of users who engaged in transactions exceeding $20,000 within a calendar year, Thailand’s Securities and Exchange Commission banning crypto lending services, and the Monetary Authority of Singapore announcing new requirements for crypto service providers to hold customer assets in a statutory trust by year-end. These regulatory developments further increase uncertainty in the market.
Investors are now questioning if Bitcoin has the strength to break above the $31,000 resistance, considering the potential economic recession and increasing regulatory measures. Fortunately, Bitcoin futures’ contract premiums can provide some insights for traders about the market’s next move. In healthy markets, BTC futures contracts typically trade at a 5% to 10% annualized premium. Currently, the demand for leveraged BTC longs has significantly increased, with the futures contract premium jumping to 6.4% on July 3, the highest level in 18 months. This shift to a neutral-to-bullish area suggests a potential upward movement.
To gauge market sentiment further, analysts also look at the options markets. The 25% delta skew, which assesses investors’ optimism, can indicate potential price movements. If the skew rises above 7%, it suggests expectations of a drop in Bitcoin’s price, while a negative 7% skew reflects excitement. The 25% delta skew metric experienced a complete turnaround, indicating bullish momentum and “greed” with a negative 13% skew on July 2.
Considering all these factors, a 6.4% futures basis and a negative 13% delta skew are considered moderately bullish. However, with analysts estimating a 50% chance for BlackRock’s spot Bitcoin approval, these metrics may appear conservative. Nevertheless, a certain level of skepticism is healthy for buyers using derivatives contracts and helps avoid the risk of cascading liquidations.
Currently, macroeconomic factors and regulatory uncertainty likely explain the relatively subdued optimism for BTC derivatives despite numerous ETF requests from major asset managers. The current Bitcoin futures’ premium, although at an 18-month high, remains modest compared to previous instances of excessive optimism. Therefore, today’s 6.3% futures premium suggests a healthy market, providing confidence to traders that bulls still have room to leverage long positions without excessive risk.
Disclaimer: This article does not provide investment advice or recommendations. Readers should conduct their own research before making any investment decisions. Every investment and trading move involves risk.