According to bitcoin derivatives data, investors expect higher odds of a pullback, but recent improvements in the global economic outlook may surprise the bears.
The link to traditional assets is the main source of investor mistrust, especially when pricing recession risks and US-China tensions ahead of House Speaker Nancy Pelosi’s visit to Taiwan. According to CNBC, Chinese officials have threatened to take action if Pelosi moves forward.
The recent interest rate hikes by the US Federal Reserve to curb inflation have increased uncertainty about risky assets, limiting the recovery of cryptocurrency prices. Investors are betting on a “soft landing,” which means the central bank will be able to phase out its stimulus activities without causing unemployment or a major recession.
The correlation scale ranges from negative 1, which means that the selected markets move in opposite directions, to positive 1, which reflects a perfect and consistent movement. The variance or no relationship between the two origins will be represented by 0.
S&P 500 and Bitcoin/USD 40-day correlation. Source: TradingView
As shown above, the 40-day S&P 500 and Bitcoin correlation currently stands at 0.72, which has been the benchmark for the past four months.
On-chain analysis supports a long-term bear market
The Blockchain Analytics firm’s “The Week On Chain” report, released on August 1, highlights weak Bitcoin transactions and demand for the block space resembling the 2018-19 bear market. The analysis indicates that a trend-breaking pattern is needed to signal the entry of a new investor:
“Active headlines [14-day moving average] above 950K indicate a slight increase in activity on the chain, indicating potential market strength and a recovery in demand.”
While blockchain metrics and flows are important, traders should also keep track of how whales and market markers are positioning in the futures and options markets.
Bitcoin derivatives metrics show no signs of ‘fear’ from professional traders
Retail traders usually avoid monthly futures contracts due to the fixed settlement date and price difference from the spot markets. On the other hand, arbitrage firms and professional traders choose the monthly contracts due to the lack of a volatile funding rate.
These fixed month contracts usually trade at a slight premium to the regular spot markets as sellers demand more funds to withhold settlement for a longer period. Technically known as “contango,” this mode is not limited to the cryptocurrency markets.
Annuity for 3-month Bitcoin futures contract. Source: Laevitas
In healthy markets, futures contracts should trade at an annual premium of 4% to 8%, which is enough to offset the risk plus the cost of capital. However, according to the above data, the Bitcoin futures premium has been below 4% since June 1. The reading is not particularly alarming given that BTC is down 52% since the beginning of the year.
To rule out the externalities of a futures instrument, traders should also analyze the Bitcoin options markets. For example, the 25% delta divergence signals when bitcoin whales and market makers are protecting against rising or falling.
If options investors fear a bitcoin price crash, the skew indicator will move above 12%. On the other hand, generalized excitation reflects a negative deviation of 12%.
Bitcoin 30-day options 25% delta skew: Source: Laevitas
The deviation index has been less than 12% since July 17, and is considered neutral. As a result, options traders price similar risks for both up and down options. Even a retest of the $20,750 support on July 26 was not enough to instill “fear” in derivatives traders.
Bitcoin derivatives metrics remain neutral despite the rally towards $24,500 on July 30, indicating that professional traders are not confident of a sustainable upside. Thus, the data shows that any unexpected move above $25,000 will surprise professional traders. Taking a bullish bet may seem paradoxical at the moment, but at the same time it creates an interesting risk-reward situation.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risks. You should do your research when making a decision