136 Interactions, 4 Today
Bitcoin derivatives markets shifted from neutral to bearish following China’s ‘crypto ban’ announcement, which caused the BTC price to fall to $40,600.
China has once again banned Bitcoin (BTC).
No, we are not going back in time. The People’s Bank of China (PBoC) published a new set of measures on September 24 to promote inter-departmental coordination in cracking down on cryptocurrency activity. The measures were designed to “disconnect payment channels and dispose of relevant websites and mobile applications in accordance with the law.”
Most investors are likely to have missed the $3 billion BTC and $1.5 billion ETH monthly options expiry that occurred less than an hour before the crypto ban news broke. According to “Molly,” a former Bitcoin Magazine contributor, the Chinese remarks were first published on September 3.
However, if some entity was hoping to profit from the negative price swing, it would have made more sense to release the news before the expiry at 8:00 a.m. UTC on Friday. For example, because the Deribit expiry price was $44,873, the $42,000 protective put option became worthless. That option holder had the right to sell Bitcoin at $42,000, but that right has no value if BTC expires above that level.
For the conspiracy theorists out there, the Chicago Mercantile Exchange (CME) Bitcoin futures expiry is the average price between 2:00 pm and 3:00 pm UTC. Consequently, the potential $340 million open interest settled near the $42,150 level. In the futures markets, buyers (longs) and sellers (shorts) are matched at all times, thus making it virtually impossible to guess which side has larger firepower.
Despite the $4,000 negative price swing, aggregate liquidations on leveraged long futures contracts were less than $120 million. This data should be highly worrisome for bears because it signals that bulls are not overconfident and that they are not using extreme leverage.
Pro traders showed some doubt but remained neutral
The futures premium, also known as the “basis rate,” can be used to determine whether professional traders are bullish or bearish.
The difference between longer-term futures contracts and current spot market levels is measured by the indicator. In healthy markets, an annualised premium of 5% to 15% is expected, a situation known as contango.
This price difference is caused by sellers demanding more money to defer settlement for a longer period of time, and a red alert appears whenever this indicator fades or turns negative, a condition known as “backwardation.”
Notice how the sharp decrease caused by the negative 9% move on Sept. 24 caused the annualized futures premium to reach its lowest level in two months. The current 6% indicator lies at the bottom of the “neutral” range, ending a moderate bullish period that lasted until Sept. 19.
To confirm whether this movement was specific to that instrument, one should also analyze options markets.
Option markets confirm traders are entering the “fear” zone
The delta skew of 25% compares similar call (buy) and put (sell) options. When “fear” is prevalent, the metric will turn positive because the premium for protective put options is higher than the premium for comparable risk call options.
When market makers are bullish, the 25 percent delta skew indicator moves into the negative territory. Readings in the negative 8% to positive 8% range are considered neutral.
The 25 percent delta skew had been ranging in the neutral zone since July 24, but it spiked to 10% on September 22, signalling “fear” among options traders. After a brief retest of the neutral 8% level, today’s Bitcoin price action has pushed the indicator above 11%. Once again, we are at a level last seen two months ago, and it is very similar to BTC futures markets.
Although no bearish signs emerged from the Bitcoin derivatives market, today’s drop below $41,000 signalling a shift in professional traders’ mindset to “fear.” As a result, futures contract traders are hesitant to open leveraged long positions, while option markets reward protective put options.
Unless Bitcoin shows strength during the weekend, bears might profit from investors’ current panic.