Bitcoin (BTC) traders have gotten used to less volatility over the past few months, but historically, it’s not uncommon for the cryptocurrency to see price swings of 10% in as little as 2 to 3 days. The recent 11.4% correction from $29,340 to $25,980 between Aug. 15 and Aug. 18 took many by surprise and resulted in the largest liquidation since the FTX crash of November 2022. But the question remains: Does this correction matter in terms of market structure?
Some experts point to reduced liquidity as the reason for the recent surge in volatility, but is that really the case?
BTC has soared more than 70% in 2023, but the “Alameda Gap” (declining liquidity after the collapse of FTX and Alameda Research) remains underpinned by low volatility.
Read the full analysis here: pic.twitter.com/g8Ac7udBl7
—Kaiko (@KaikoData) August 17, 2023
As the Kaiko data chart shows, the 2% drop in Bitcoin order book depth reflects the drop in volatility. Market makers may adjust their algorithms to accommodate current market conditions.
Therefore, it seems reasonable to delve into the derivatives market to assess the impact of a drop to $26,000. The purpose of this check is to determine whether whales and market makers have become bearish, or if they are demanding a higher premium for protective hedge positions.
First, traders should look for similar events that have occurred recently, of which two stand out:
The first drop occurred between March 8 and 10, sending bitcoin plunging 11.4 percent to $19,600, its lowest point in more than seven weeks. The adjustment follows the liquidation of Silvergate Bank, a key operating partner for several cryptocurrency companies.
Subsequent major moves occurred between April 19 and April 21, resulting in a 10.4% drop in Bitcoin’s price. The index revisited the $27,250 level for the first time in more than three weeks after SEC Chairman Gary Gensler spoke before the House Financial Services Committee. Gensler’s statement did little to convince the agency’s enforcement-driven oversight efforts would stop.
Not every 10% Bitcoin price crash is the same
Quarterly bitcoin futures typically trade at a slight premium compared to the spot market. This reflects sellers’ tendency to delay settlement for additional compensation. A healthy market typically shows an annualized premium of between 5% and 10% for BTC futures contracts. This situation, known as “contango,” is not unique to the cryptocurrency space.
Prior to the March 8 crash, Bitcoin was in a 3.5% contango, suggesting a middling market. However, pessimism intensified when the price of Bitcoin fell below $20,000, sending the indicator down 3.5%. This phenomenon is known as “backwarding” and is a typical bearish market condition.
Conversely, the correction on April 19 had little impact on the main indicator of Bitcoin futures, with the premium remaining around 3.5% as BTC prices returned to $27,250. This could mean that professional traders are either confident in the soundness of the market structure or are well prepared for a 10.4% correction.
Compared with the recent event (BTC crash of 11.4% between August 15th and August 18th), it can be seen that there is a clear difference from the previous events. The starting point for Bitcoin futures contango is higher, above the 5% neutral threshold.
Note how quickly the derivatives market absorbed the August 18th shock. BTC futures contango quickly returned to a neutral to bullish position at 6%. This suggests that the drop to $26,000 did not significantly dampen the optimism of whales and market makers towards the cryptocurrency.
Options Market Confirms Lack of Bearish Momentum
Traders should also analyze the options market to see if the recent correction has caused professional traders to become more risk-averse. In short, if a trader expects a Bitcoin price drop, the Delta Bias indicator will rise above 7%, while euphoria phases tend to see a negative bias of 7%.
Related: Why Are Crypto Markets Falling Today?
The data showed excess demand for call (buy) BTC options ahead of the Aug. 15 crash, with the indicator at -11%. The trend reversed over the next five days, although the indicator remained in the neutral range and was unable to breach the 7% threshold.
Ultimately, neither bitcoin options nor futures indicators are showing signs of professional traders taking a bearish stance. While this doesn’t necessarily guarantee a quick return to the $29,000 support for BTC, it does reduce the likelihood of a further price correction.
This article is for general informational purposes only and is not intended and should not be construed as legal or investment advice. The views, ideas and opinions expressed here are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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