Although the price of bitcoin has reached $32,000, derivatives measures continue to show symptoms of fragility.

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The price of bitcoin has recovered 8.5 percent to $32,000, but derivatives data reveals that professional traders remain cautious.

There’s no denying that the previous few months have been bearish for Bitcoin (BTC), but derivatives indicators have been reasonably neutral during that time. This could be due to the fact that cryptocurrencies have a history of significant volatility, with even 55 percent corrections from all-time highs forecast.

 

After two months of struggling to sustain the $30,000 support and finally losing it on July 20, the futures premium and options skew turned bearish. Even PlanB’s stock-to-flow valuation model was not expecting prices below $30,000 for the current month. The model uses the stock-to-flow ratio, which is defined by the current number of Bitcoin in circulation and the yearly issuance of newly mined Bitcoin.

On-chain data is positive, but derivatives indicators are not

On-chain analytics show that the monthly average of 36,000 BTC withdrawn from exchanges is usually interpreted as accumulation. However, this superficial analysis fails to acknowledge the increased use of tokenized Bitcoin in decentralized finance (DeFi) applications.

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RenBTC and Wrapped BTC aggregate supply. Source: Cointrader.pro

The chart above shows that 40,660 BTC have been added to Wrapped Bitcoin (WBTC) and RenBTC (RENBTC) over the past three months. This number does not consider deposits at BlockFi, Nexo, Len and the multiple services that provide yield on user’s cryptocurrency deposits.

Removing Bitcoin previously deposited on exchanges could be a sign that traders’ intent to sell in the short term is reduced. Still, at the same time, it might also represent investors seeking higher returns in other avenues. In short, these coins might have been sitting on exchanges as collateral or as a long-term holding.

As previously mentioned, derivatives indicators flipping negative should hold more weight than assumptions on the bullish or bearish interpretation of on-chain data. In an initial analysis, analysts should review the futures contracts premium, which is also known as the basis.

This indicator allows investors to understand how bullish or bearish professional traders are because it measures the difference between monthly futures contracts and the current spot market price.

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A neutral basis rate should be between 7% to 15% annualized. This price difference is caused by sellers demanding more money to postpone settlement, a situation known as contango.

Huobi 1-month BTC futures basis. Source: Skew

Backwardation is a very bearish event that occurs when this premium disappears or goes negative. On July 20, the indicator remained at a negative 2.5 percent level for more than twelve hours for the first time.

Professional traders are likely to be negative right now as Bitcoin fell below the crucial $30,000 support level, but further evidence might be found in the options markets.

Pro traders are seeking protective put options

Options, unlike futures transactions, have two different instruments. The buyer of a call option receives upside price protection, while the buyer of a put option receives the right to sell Bitcoin at a fixed price in the future. In neutral-to-bearish strategy, put options are commonly used.

Bitcoin options put-to-call ratio. Source: Cryptorank.io

When the put-to-call ratio rises, it indicates that open interest in these neutral-to-bearish contracts is increasing, which is typically taken as a negative indicator. The latest data, at 0.66, continues to favour call options, although these instruments are losing ground.

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There is ample evidence of bearishness in the futures and options markets right now, which hasn’t been the case in the previous two months. After the $30,000 support failed to hold in the last 48 hours, even professional traders are losing faith.

 

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