The cryptocurrency market has experienced some recent events that were previously expected to have a severe negative impact on prices, but Bitcoin (BTC) was trading near $37,000 on November 22, essentially the same as three days earlier.
This performance was completely unexpected given the relevance of Binance’s November 21 plea agreement with US authorities for violating laws related to money laundering and terrorist financing.
Bad news has limited impact on Bitcoin price
One could argue that entities have been manipulating Bitcoin’s price to avoid contagion, possibly involving the issuance of unbacked stablecoins — especially those with direct ties to exchanges that have come under regulatory pressure. Therefore, to determine whether investors have become highly risk averse, Bitcoin derivatives should be analyzed rather than focusing solely on current price levels.
The U.S. government indicted Binance and Changpeng “CZ” Zhao in Washington state on November 14, but the documents were unsealed on November 21. After pleading guilty, CZ exited Binance’s management as part of the deal. Penalties total more than $4 billion, including fines imposed on CZ personally. The news triggered trading of just $50 million in leveraged long futures contracts on Bitcoin after the price of Bitcoin temporarily fell to $35,600.
It is worth noting that on November 20, the U.S. Securities and Exchange Commission (SEC) sued the Kraken exchange, accusing it of mixing customer funds and failing to register with the regulatory agency as a securities broker, dealer, and clearing agency. Additionally, the complaint alleges that Kraken pays operating expenses directly from accounts containing customer assets. However, Kraken said the SEC’s hybrid charges were previously earned fees and therefore are essentially their proprietary property.
Another potentially disastrous news comes from Mt. Gox, a now-defunct Bitcoin exchange that lost 850,000 BTC to a hack in 2014. Mt. Gox trustee Nobuaki Kobayashi announced on November 21 the redemption of $47 million in trust assets and the company reportedly plans to begin making its first cash repayments to creditors in 2023. Although there is no information about the sale of Bitcoin assets, investors speculate that this final milestone is closer than ever.
One will find posts on social networks from experienced traders and analysts who predict that the cryptocurrency market will collapse if Binance is sued by the US Department of Justice. Listed below are some examples, and it’s safe to say that this theory is almost universal among investors.
The ETF is denied, and if the DOJ files charges against Binance soon, there will likely be a slow bleed that could lead to a major crash.
— Parrot Capital (@ParrotCapital) August 26, 2023
I don’t believe in coincidences. The universe has rarely been so lazy.
Expect the ETF to be rejected and the U.S. Department of Justice to crack down on Binance, crushing the bulls’ 2023 dreams.
— McKenna (@Crypto_McKenna) July 31, 2023
Note how McKenna predicted that Binance would be sued by the U.S. Department of Justice, further adding that an ongoing Bitcoin spot exchange-traded (ETF) fund application would be rejected by the SEC. But, as counterintuitive as it sounds, being fully compliant on Binance would increase the chances of the spot ETF being approved. That’s because it significantly weakens the SEC’s previous denial of the main argument that unregulated exchanges had excessive market share.
The Spot Bitcoin ETF did not give any specific information regarding recent regulatory actions, but modifications to multiple proposals hint at healthy discussions with the SEC.
Bitcoin derivatives show resilience
In order to confirm whether Bitcoin price elasticity meets the risk assessment of professional investors, Bitcoin futures and options indicators should be analyzed. For example, traders may rush to hedge their positions, which would not put pressure on the spot market but would significantly impact Bitcoin futures contango and options pricing.
Bitcoin monthly futures contracts tend to be priced differently than regular spot exchanges because participants require more funds to delay settlement. This is not unique to cryptocurrencies, in a neutral market the annualized interest rate should be closer to 5%.
Note that Bitcoin futures are currently trading at an 8% premium, which suggests there is excessive demand for leveraged longs, but it is far from excessive. This level is down from 11.5% in mid-November, but is quite positive considering the recent regulatory news.
related: BlackRock meets with SEC officials to discuss spot Bitcoin ETF
In order to confirm whether Bitcoin derivatives are not experiencing large inflows of hedging operations, the Bitcoin options market also needs to be analyzed. A 25% delta deviation is a telltale sign when arbitrage desks and market makers charge too much for upside or downside protection.
The delta 25% bias tends to rise above 7% when traders expect Bitcoin prices to fall, while periods of excitement often drop below negative 7%.
As shown above, choosing a delta skewness of 25% indicates optimism over the past four weeks, as put (sell) options trade at a discount compared to similar call (buy) options. What’s more, the recent news has done nothing to change professional traders’ interest in hedging strategies.
Overall, given derivatives indicators, there is no doubt that sentiment is high due to the impact of regulatory action and potential selling pressure on Mt Gox.
Furthermore, the liquidation of $70 million in leveraged BTC longs reduces the pressure for negative price movements in the future, meaning that even if prices return to $35,000, there is no sign of over-optimism.
With the final round of ETF decisions scheduled for January and February, Bitcoin bears have little incentive to pressure the market and negative news has zero impact. Eventually, the path to $40,000 became more certain.
This article does not contain investment advice or recommendations. Every investment and trading activity involves risks, and readers should do their own research when making decisions.
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