Bitcoin Derivatives Show A Lack Of Confidence From Bulls


Bitcoin (BTC) has been on an upward trend since mid-July, although the current ascending channel formation supports $21,100. This pattern has lasted for 45 days and could push BTC to $26,000 by the end of August.

Bitcoin/USD 12-hour price. Source: TradingView

According to data on Bitcoin derivatives, investors estimate a higher probability of a downturn, but recent improvements in the global economic perspective may surprise the bears.

The correlation with traditional assets is the main source of investor mistrust, especially when recession risks and tensions between the United States and China are priced in ahead of House Speaker Nancy Pelosi’s visit to Taiwan. According to TBEN, Chinese officials threatened to take action if Pelosi went further.

The US Federal Reserve’s recent rate hikes to curb inflation added uncertainty to risky assets, limiting crypto price recovery. Investors are betting on a “soft landing,” meaning the central bank will be able to gradually withdraw its stimulus activity without triggering significant unemployment or recession.

The correlation metric ranges from a negative 1, which means certain markets are moving in opposite directions, to a positive 1, which reflects a perfect and symmetrical movement. An inequality or lack of relationship between the two assets would be represented by 0.

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

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

On-chain analysis confirms longer-term bear market

Blockchain analytics firm Glassnode’s August 1 “The Week On Chain” report highlighted Bitcoin’s weak transaction and demand for block space akin to the 2018-19 bear market. The analysis suggests that a trend-breaking pattern is needed to signal the influx of new investors:

“Active addresses [14 days moving average] breaking above 950k would signal an uptick in on-chain activity, pointing to potential market strength and demand recovery.”

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

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Bitcoin Derivatives Statistics Show No Signs Of “Fear” From Professional Traders

Retailers usually avoid monthly futures because of their fixed settlement date and price difference from spot markets. On the other hand, arbitration agencies and professional traders opt for monthly contracts due to the lack of a fluctuating financing rate.

These fixed month contracts usually trade at a small premium to regular spot markets as sellers charge more money to hold back settlement longer. Technically known as ‘contango’, this situation is not exclusive to crypto markets.

The annualized premium of Bitcoin 3-month futures. Source: Laevitas

In healthy markets, futures should trade at a 4% to 8% annualized premium, enough to offset the risks plus the cost of capital. However, according to the above data, Bitcoin futures premium has been below 4% since June 1. The reading is not particularly concerning as BTC has fallen 52% this year.

To rule out externalities specific to the futures instrument, traders should also analyze the Bitcoin options markets. For example, the 25% delta skew signals when Bitcoin whales and market makers charge too much for upside or downside protection.

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If options investors fear a Bitcoin price crash, the skew indicator would rise above 12%. On the other hand, generalized arousal reflects a 12% negative skew.

Bitcoin 30 Day Options 25% Delta Skew: Source: Laevitas

The skew indicator has been below 12% since July 17, which is considered neutral territory. As a result, options traders are pricing similar risks for both bullish and bearish options. Even the retest of the $20,750 support on July 26 wasn’t enough to spark “fear” for derivatives traders.

Bitcoin derivatives statistics remain neutral despite the rally to $24,500 on July 30, suggesting that professional traders are not confident in a sustainable uptrend. So data shows that an unexpected move above $25,000 would surprise professional traders. Taking a bullish bet may seem contradictory at the moment, but at the same time 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 TBEN. Every investment and trading move involves risks. You should do your own research when making a decision