Bitcoin (BTC) futures contango reached its highest level in 18 months on July 4. But traders are now questioning whether derivatives indicators point to “overexcitement” or a “reversion to the mean” after a prolonged bear market.
Bitcoin price gains limited by regulators and macroeconomics
Since June 22, bitcoin’s price has been trading in a tight 4.4 percent range, fluctuating between $29,900 and $31,160 as measured by daily closing prices. The lack of a clear trend may make some uncomfortable, but it reflects opposing drivers at play right now.
For example, the historic inversion of the U.S. Treasury yield curve to its highest level on record has had a negative impact on investor sentiment.
The closely monitored inverted spread between 2-year and 10-year notes has reached its highest level since 1981 at 1.09%. This phenomenon, known as a yield curve inversion, typically precedes a recession, when yields on short-dated Treasuries are higher than those on long-dated Treasuries.
Related: Fed Pauses Rate Hikes, But Bitcoin Options Data Still Suggests Bitcoin Price Falls
On the other hand, signs of strengthening in the U.S. economy were reported Driven Investors are anticipating the possibility of further rate hikes by the central bank to keep inflation under control.
In addition to these macroeconomic distortions, cryptocurrency regulation has also been in the spotlight for investors recently. The following are just some recent examples:
- The Kraken exchange was required by the U.S. District Court for the Northern District of California to provide details of users who traded more than $20,000 in a calendar year;
- Thailand’s Securities and Exchange Commission banned crypto lending services, thereby prohibiting crypto platforms from providing any form of return to customers for depositing cryptocurrencies;
- The Monetary Authority of Singapore has announced new requirements for cryptocurrency service providers to hold client assets in fiat trusts by the end of the year.
Therefore, investors may now be asking: does Bitcoin have the ability to break through the $31,000 resistance level? Of course, we must first consider a potential recession and the growing regulatory crackdown around the world.
Fortunately, the contract premium on Bitcoin futures can give traders some clues as to where the market is going next, for reasons explained below, along with the cost of hedging with Bitcoin options.
Bitcoin futures premium hits 18-month high
Bitcoin quarterly futures are popular among whales and arbitrage platforms. However, these fixed-month contracts typically trade slightly above the spot market, suggesting sellers are asking for more money to delay settlement.
Therefore, BTC futures contracts in a healthy market should trade at an annualized premium of 5% to 10%, a condition known as contango, which is not unique to the cryptocurrency market.
Leveraged BTC long demand has increased significantly over the past week, with futures contract premiums jumping from 3.2% a week earlier to 6.4% on July 3. In addition to reaching its highest level in 18 months, the indicator has also finally moved into neutral to bullish territory.
Related: Here’s What’s Happening in the Crypto Space Today
To further gauge market sentiment, it is also helpful to look at the options market, as a delta deviation of 25% can assess whether price stagnation is making investors less optimistic. It reveals when arbitrage desks and market makers charge higher prices to prevent upside or downside moves.
In short, if traders expect the price of Bitcoin to fall, the bias indicator will rise above 7%, while euphoric times usually see a negative bias of 7%.
The Delta Skewness indicator at 25% has undergone a complete shift, indicating a pick-up in bullish momentum when it broke below -7% on June 21. As the price of Bitcoin climbed back above $30,000, the metric continued to improve, culminating in a “greedy” negative bias of 13% on July 2.
Moderately Optimistic ‘Health’ for Bitcoin Market
Typically, a futures basis of 6.4% and a negative delta skew of 13% would be considered moderately bullish. However, these metrics may be viewed as conservative, given that analysts estimate a 50% chance of BlackRock Spot Bitcoin approval. But for buyers using derivatives contracts, a certain level of skepticism is indeed healthy and avoids the risk of cascading liquidations.
Related: The Bitcoin ETF Race Is On: Is Institutional Trust In Crypto Restored?
Currently, macroeconomic factors and regulatory uncertainty may explain dampened optimism for BTC derivatives despite multiple ETF requests from the world’s largest asset managers.
So, aside from the 18-month high, the current premium on Bitcoin futures remains relatively modest compared to previous overly optimistic scenarios (eg 19% in October 2021).
Thus, today’s contango of 6.3% represents a healthy market, while 10% or higher indicates excessive optimism or excitement. Also, traders should remain confident given that bulls have room to leverage their long positions further without taking too much risk.
This article does not contain investment advice or advice. Every investment and transaction involves risk, and readers should do their own research when making a decision.
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