The daily Bitcoin (BTC) price chart appears to be showing a strong recovery pattern, but some worrying indicators are coming from the derivatives markets. At the moment, the futures and options markets are showing uncertainty from professional Bitcoin traders, but there is a positive trend in the data.
Bitcoin price on Coinbase, in US dollars. Source: Trading View
The road to $40K seems uncomfortable to predict, and cryptocurrency traders usually refer to it as “manipulation” when such price moves occur.
Regardless of the reason for the bitcoin price rally, investors should analyze the derivatives markets to understand how the whales, market makers and arbitrators are positioning themselves.
While the preferred instrument of retail traders are perpetual contracts (reverse swaps), professional traders often opt for fixed-calendar futures and options. Although these derivatives are difficult to trade, they offer more sophisticated strategies.
The liquidations are over, but the road to $69K is behind us.
The data shows that there has been no similar termination of futures contracts since January 23. When leveraged long positions (buyers) are closed, this increases the price correction as the derivatives exchanges have to sell these futures contracts at market prices.
Total number of cryptocurrency liquidations in US dollars. Source: Coinglass
Note that the last “major” long shutdown of electricity was on January 23 for $290 million. This partly explains why Bitcoin’s recovery has been relatively quiet over the past week. However, the market is far from the water, with BTC currently trading 44% below an all-time high of $69,000.
Annual premium on 3-month Bitcoin futures contracts. Source: Laevitas.ch
The annual premium on Bitcoin futures contracts should be between 5% and 12% to compensate traders for “locking in” funds for two to three months before the contract expires. Levels below 5% are very bearish, while numbers above 12% are bullish.
The chart above shows that this number fell on January 21st to below 5% and so far is not showing any confidence signals from professional traders.
So the big question is: Is the glass half full? For example, if Bitcoin breaks the $42,000 resistance, some traders will likely be surprised, so there is additional buying activity because no one wants to be left behind.
Bitcoin futures markets are neutral, but options traders are skeptical
It is a bit difficult to determine the direction of the market at the moment, but a skewed delta of 25% is a clear sign when arbitrage agencies and market makers are overpriced in order to protect the upside or downside.
If traders fear a crash in the bitcoin price, the skew indicator will rise above 10%. On the other hand, generalized excitability reflects negative 10 percent asymmetry.
30-day bitcoin options with a delta bias of 25%: Source: Laevitas.ch
As shown above, we’ve been around 10% for about a week despite the 18% recovery in BTC price from the $33,000 low. Options distortion data shows that professional traders are still considering increasing the chances of a market crash.
Despite the non-positive bitcoin option indicator, these arbitrage agencies and market makers will be forced to reverse bearish positions once the price breaks $42,000. But given that the futures premium has not shown any signs of desperation despite the market being down 52% from an all-time high, the data is constructive.
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 involves risks. You should do your research when making a decision.