The price of bitcoin is correcting, but what does futures data show?

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Bitcoin’s price was rejected near $58,000, but derivatives data shows traders are neutral-to-bullish, leaving enough “room” for a new all-time high in 2021.

For the past two months, Bitcoin had outperformed most altcoins, but that trend reversed this week when (BTC’s) 20% rally pushed its market capitalisation past $1 trillion on Oct. 6. 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 positive momentum could be dangerous if Bitcoin traders become overconfident and abuse leverage to open long positions. To avoid this, traders need to carefully analyze derivatives markets to exclude this risk.

Top 14 coins weekly performance. Source: CoinMarketCap

Notice how the market capitalisation of altcoins 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 capitalisation of altcoins did not correspond to Bitcoin’s performance.

Some well-known figures, such as billionaire Wall Street investor Bill Miller, have recently expressed optimism for Bitcoin while raising concerns 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.

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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.

Bitcoin 3-month futures annualized basis. Source: Laevitas.ch

In healthy markets, an annualised premium of 5% to 15% is expected, a situation known as contango. This price disparity is caused by sellers demanding more money in order to postpone settlement for a longer period of time.

The recent 20% increase in the price of Bitcoin caused the indicator to reach the upper limit of this neutral zone, indicating that investors are bullish but not overconfident. When buyers require excessive leverage, the basis rate can easily exceed 25%, as seen in mid-May.

To exclude futures-specific externalities, one should also examine options markets.

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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 negative 8% and positive 8% are usually deemed neutral.

Deribit BTC options 25% delta skew. Source: Laevitas

The above chart shows that there hasn’t been a single instance of options traders becoming overconfident in the past six months, which would signal “greed” because the 25% delta skew dropped below negative 8%. Meanwhile, the indicator has ranged near 0 for the past week, showing balanced risks between the 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 cautiously optimistic, and even a 20% price drop is unlikely to change the situation because the futures market’s basis rate shows a reasonable premium following the recent rally.

 

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