Bitcoin (BTC) has been below $ 45,000 for 14 days and is currently 40% below the all-time high of $ 69,000. The movement is similar to the end of September 2021, when the price of bitcoin remained stable for 11 days and was 36% below the previous record high of $ 64,900 on April 14.
Bitcoin price on Coinbase in USD. Source: Trading View
To understand whether the current price momentum will repeat itself at the end of September, traders should start by looking at the premium on bitcoin futures, also known as the “base”. Unlike a perpetual contract, these fixed calendar futures contracts do not have a financing rate, so their price will deviate significantly from a regular spot exchange.
By measuring the cost gap between a futures contract and the regular spot market, a trader can measure the level of a trend in the market. Excessive buying optimism leads to three-month futures contracts of 15% or higher with an annual premium (basis).
Bitcoin futures premiums for 3 months in September 2021. Source: laevitas.ch
For example, earlier in September, the underlying price hovered between 9% and 13%, indicating confidence, but on September 29, just before bitcoin hit $ 45,000, the premium to the 3-month futures contract was 6.5%. In general, readings below 5% are bearish, so a reading of 6.5% at the end of September means that investors are showing low confidence.
Bitcoin futures premium for 3 months. Source: laevitas.ch
In terms of current market conditions, there is a lot in common with September 2021, before Bitcoin broke the $ 45,000 mark and started up 62%. First, the current 3-month premium on Bitcoin futures is 6.5% and the index has hovered between 9% and 11% recently, reflecting mild optimism.
Unexpected positive market movements occur when investors least expect them, and this is exactly the scenario that is happening now. To confirm whether this move is instrument-specific, the option markets must also be analyzed. A delta deviation of 25% compares corresponding buy (buy) and sell (sell) alternatives. The indicator will be positive when “fear” prevails because the premium for protective put options is higher than for call options.
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The opposite is proven when market makers are bullish, which causes the delta to deviate 25% to negative territory. Measurements between negative 8% and positive 8% are considered neutral.
Deribit Bitcoin Alternatives In September 2021, 25% drove delta. Source: laevitas.ch
The Delta deviation varied from 25% to almost 10% by the end of September 2021, which indicates that option traders are not satisfied. Market makers and arbitrageurs exaggerated the possibilities of opening protective short positions (bearish).
Deribit Bitcoin options with a delta skew of 25%. Source: laevitas.ch
According to the current delta skew index of 25%, option traders are neutral. On January 10, however, the indicator reached the positive threshold of 8%, indicating a moderate downward trend.
Derivative readings show that current market conditions are similar to the end of September, when bitcoin reversed a 24-day downtrend and started up 62% over the next three weeks.
Will this phenomenon happen again? Bitcoin bulls certainly hope so.