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A derivatives market tracker that suggests a price bottom could provide some relief to Bitcoin bulls.
As the price of Bitcoin (BTC) attempts to establish support at $37,000 on Tuesday, one derivatives sector predictor that has a history of correctly forecasting BTC/USD cyclical lows following its bear cycles indicates that the latest $30,000 lows might have been the lowest.
The last time it expected a bottom was on November 1, after which the price of one Bitcoin increased from $13,771 to as much as $64,899 on Coinbase.
Anatomy of a bullish indicator
The metric, dubbed “rolling basis,” mathematically describes the relative difference between the price of the futures contract and the spot rate over an annual timeframe. For example, if a Bitcoin contract trades at a 2.5 percent premium to its spot price on a three-month basis calendar, its annualised rolling basis is 10%.
Assets in the futures market sell at either a discount or a premium in retrospect. Backwardation occurs when an asset’s spot rate is higher than its futures price (discount). When the spot rate trades below the futures rate, as is common in conventional stock markets, this is referred to as being in contango (premium).
Bitcoin futures markets usually oscillate between backwardation and contango. In a bull market, excessive contango always indicates a limit. In contrast, intense backwardation aids in locating possible bottoms in a bear market.
For example, the Bitcoin Futures market on OKEx witnessed a contango spike above the 3.5 percent threshold in June 2019. It peaked at at 6.8 percent around the same time Bitcoin reached $11,000. The BTC/USD spot rate, on the other hand, continued to rise until it hit $14,000. Following that, the pair entered a multi-month bear market, ultimately bottoming out at $3,100 in December 2019.
Ben Lilly, a crypto economist at Jarvis Labs, compared the reading on the “BTC Futures Annualized Rolling 3 Month Basis” chart to Bitcoin spot prices, observing that when the former reaches or closes below 1%, the latter interprets it as a signal to bottom out and begin a new upward trend.
The BitMEX map above illustrates many occasions where the rolling basis reading drops below 1% during Bitcoin’s spot price declines. Later, the cryptocurrency began a recovery rally — a new bullish stage — before correcting once more to reach a new bottom just as the rolling basis fell below 1%. Rinse then re-rinse.
For example, during the coronavirus-led global market collapse in March 2020, Bitcoin futures logged a backwardation rise of just short of 14 percent, putting Bitcoin’s spot market bottom at around $3,858.
Bitcoin futures rolling basis as of May 25
Lilly posted a Skew chart showing BTC Futures annualised rolling basis falling below 1% for the first time since November 2020.
“This looks promising in terms of finding a bottom,” noted Lilly in his newsletter.
“It harkens back to why we use funding rates so much. Because just when people think crypto is coming to an end and it’s off to the woodshed, it bounces back.”
He went on to say that based solely on basis readings, now is a reasonable time for Bitcoin spot traders to accumulate, though he cautioned that this does not imply opening leveraged long positions in the futures market.c
Owing to a shortage of bullish trades, the risks in the derivatives industry tended to be higher. Lilly said that the sell-off pressure has not subsided after the entry of USD Coin (USDC) worth $6 billion into the market, indicating that buyers continue to use the dollar-pegged stablecoin to purchase cryptocurrencies such as Bitcoin.
“Right now we’re flying in no man’s land,” he added.
The comments came as Bitcoin displayed an unprecedented bias controversy in the short term, logging wild intraday market fluctuations in previous sessions. BTC’s price was refused by opposition at the $40,000 mark on Monday.
BTC is now attempting to find help at $37,000, which is about 40% lower than the all-time record.