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Bitcoin’s price was rejected near $58,000, but derivatives data show traders were neutral-to-bullish, allowing for a new all-time high in 2021.
Bitcoin had been underperforming most altcoins over the previous two months, but that trend reversed on Oct. 6, when a 20 percent rally pushed its market capitalisation past $1 trillion. As a result, investors’ focus has shifted back to the leading cryptocurrency, and altcoins are currently trading in the red for the day.
The current upward trend in Bitcoin (BTC) prices could be dangerous if traders become overconfident and use leverage to open long positions. To avoid this, traders must carefully analyse derivatives markets in order to eliminate this risk.
Notice how the altcoin market cap increased by 5.8 percent, while Bitcoin increased by 20.8 percent during the same time period. There were some outliers, such as Shiba Inu (SHIB), which increased by 200 percent, Fantom (FTM), which increased by 60 percent, and Klaytn (KLAY), which increased by 36 percent. However, the total market cap of altcoins did not match Bitcoin’s performance.
Some well-known figures have spoken out, such as billionaire Wall Street investor Bill Miller, who recently expressed his optimism for Bitcoin while expressing reservations about the majority of altcoin projects. Miller specifically mentioned “big banks” getting involved and “huge amounts” of venture capital money flowing into Bitcoin.
The recent Bitcoin frenzy appears to be fueled by the macroeconomic scenario. The United States raised its debt ceiling by $480 billion in order to meet its obligations until early December. Inflationary pressures caused by never-ending stimulus packages and low interest rates have fueled commodities’ long rally.
Oil, for example, has reached its highest level in seven years, and wheat futures have recently reached a high not seen since February 2013. Even the S&P Case-Shiller home price index has increased by 23.3 percent on an annualised basis.
To determine whether Bitcoin traders became overly excited, traders should look at derivatives indicators such as futures market premium and options skew.
The futures premium shows traders are slightly bullish
The basis rate measures the difference between longer-term futures contracts and the current spot market levels. This indicator is also frequently referred to as the futures premium.
A 5% to 15% annualized premium is expected in healthy markets, which is a situation known as “contango.” This price difference is caused by sellers demanding more money to withhold settlement longer.
The recent 20% Bitcoin price rally caused the indicator to reach the upper limit of this neutral zone, meaning investors are bullish but not yet overconfident. Whenever buyers demand excessive leverage, the basis rate can easily surpass 25%, as seen in mid-May.
To exclude externalities specific to the futures instrument, one should also analyze options markets.
Bitcoin options signal “neutral” sentiment
The 25% delta skew compares similar call (buy) and put (sell) options. This metric will turn positive whenever “fear” is prevalent because traders expect potential downside.
The opposite holds when option traders are bullish, causing the 25% delta skew indicator to shift to the negative area. Readings between -8% and +8% are usually deemed neutral.
The chart above shows that there hasn’t been a single instance of options traders becoming overconfident in the last six months, which would indicate “greed,” because the 25 percent delta skew has dropped below -8 percent. Meanwhile, the indicator has been hovering around zero for the past week, indicating a balance of risks between bears and bulls.
Those findings appear to indicate a lack of buyer confidence, but the reality is quite the opposite. If Bitcoin bulls were already overconfident at $57,000, there would be little room for additional leverage, increasing the risk of a cascading liquidation if the price fell temporarily.
Bulls are modestly confident, and even a 20% price correction is unlikely to change the situation because the futures market’s basis rate shows a reasonable premium after the recent rally.