Bitcoin price corrected, but what does futures data show?

Bitcoin had underperformed most altcoins in the past two months, but that trend was reversed this week when BTC’s 20% rally raised its market cap on Jan.. This brought investor attention back to the leading cryptocurrency, with altcoins currently in the red for the day.

The current positive momentum could become dangerous if Bitcoin traders get too confident and abuse leverage to open long positions. To avoid this, traders need to carefully analyze derivatives markets to eliminate this risk.

Weekly performance of the top 14 coins. Source: CoinMarketCap

Note that altcoins’ market cap increased 5.8% while bitcoin grew 20.8% over the same period. Of course there were some outliers such as Shiba Inu (SHIB) with an increase of 200%, Fantom (FTM) with an increase of 60% and Klaytn (KLAY) with an increase of 36%. However, the aggregate market capitalization of Altcoins has not been able to keep up with Bitcoin’s performance.

Bitcoin price corrected, but what does futures data show?
Bitcoin price corrected, but what does futures data show?

Some well-known figures, like billionaire Wall Street investor Bill Miller, recently expressed optimism about Bitcoin but also expressed concern about most of the altcoin projects. Miller explicitly mentioned the involvement of “big banks” and referred to the “huge amounts” of venture capital funds flowing into Bitcoin.

The recent Bitcoin frenzy appears to be driven by the macroeconomic scenario. The United States raised its debt ceiling by $ 480 billion to meet its obligations by early December. Inflationary pressures from endless stimulus packages and meager interest rates fueled the long rally in commodities.

For example, oil hit its highest level in seven years, and wheat futures recently hit a record that hasn’t been seen since February 2013. Even the SP Case-Shiller house price index is up 23.3% on an annualized basis.

To understand if bitcoin traders are too excited, traders should look at bitcoin derivatives indicators like the futures markets premium and option bias.

The futures premium shows that traders are slightly optimistic

The base index measures the difference between long-term futures contracts and the current spot market level. This indicator is often referred to as the futures premium.

3-month Bitcoin futures on an annual basis. Source: Laevitas.ch

An annualized premium of between 5% and 15% is expected in healthy markets, Situation known as contango. This price difference is due to sellers charging more money to keep the billing longer.

The recent 20% rally in Bitcoin price has caused the indicator to hit the upper bound of this neutral zone. which means that investors are bullishbut they still don’t have a lot of confidence. If buyers demand excessive leverage, the base rate can easily exceed 25% as seen in mid-May.

In order to eliminate the externalities inherent in the futures instrument, it is also necessary to analyze the options markets.

Bitcoin options signal “neutral” sentiment

The 25% delta skew indicator compares similar call and put options. This metric is positive when there is “fear” as traders anticipate a possible decline.

The opposite occurs when options traders are bullish, causing the 25% delta skew indicator to move into negative territory. Measured values ​​between minus 8% and plus 8% are generally considered to be neutral.

Source: Laevitas

The graph above shows that there hasn’t been a single instance of overconfidence by options traders in the past six months, which would be a sign of “greed”.as the 25% delta skew fell below the negative 8%. Meanwhile, the indicator has hovered near 0 for the past week, showing a balance of risk between the bears and the bulls.

These results inevitably show a lack of buyer trust, but the opposite is true. If Bitcoin bulls were overconfident at $ 57,000, there would be little room for additional leverage, which increases the risk of a cascading sell-off should a momentary price correction occur.

The bulls are modestly confident and even a 20 percent price correction is unlikely to turn the tables as the futures market base rate is reasonably priced after the recent rally.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and every operation is associated with risks. When making a decision, you need to do your own research.

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