Bitcoin had been performing poorly against other altcoins over the past two month, but this trend was reversed by its 20% rally that drove its market capitalization above $1 trillion on Oct. 6. This shifted investors’ attention to the top cryptocurrency and altcoins are currently in red.
If Bitcoin (BTC), traders get too confident and use leverage to open long positions, the current positive momentum can be dangerous. This risk can be avoided by traders analyzing derivatives markets carefully to avoid it.
Weekly performance of the top 14 coins Source: CoinMarketCap
You can see above that the altcoin market cap increased by 5.8% while Bitcoin experienced a 20% gain during the same period. There were exceptions like Shiba Inu, which rose by 200% and Fantom, which rallied 60%, as well as Klaytn, which gained 36%. The aggregate market capitalization of altcoins was not as strong as Bitcoin’s.
Some prominent personalities have spoken out, including Bill Miller, a billionaire Wall Street investor, who recently expressed optimism for Bitcoin, while raising concerns about most altcoin projects. Miller specifically mentioned that “big banks” were involved in the Bitcoin project and also referred to “huge amounts of venture capital money flowing into Bitcoin.
The macroeconomic situation seems to have fueled the recent Bitcoin frenzy. To pay its obligations, the United States increased its debt limit to $480 billion. Long-term commodities rallies have been fueled by the inflationary pressure caused by interminable stimulus packages and low interest rates.
Oil reached its highest point in seven years, while wheat futures hit a new record high. This was not possible since February 2013. The annualized S&P Case-Shiller home prices index has seen a 23.3% increase.
For a better understanding of why Bitcoin traders get too excited, traders can analyze Bitcoin’s derivatives indicators such as the futures market premium and options skew.
Futures premium shows that traders are slightly bullish
The basis rate is the difference between the current spot market level and longer-term futures contracts. This indicator is often referred to as “the futures premium”.
Annualized Bitcoin 3-month Futures. Source: Laevitas
In healthy markets, a 5% to 15% annualized price premium is to be expected. This is known as “contango” and sellers are demanding more money in order to delay settlement.
The indicator reached the upper limit of the neutral zone after the recent 20% Bitcoin price rally. This indicates that investors are bullish, but not too confident. As seen in mid May, buyers can demand excessive leverage and the basis rate easily exceeds 25%.
Option markets can be used to exclude externalities that are not specific to futures instruments.
Options for Bitcoin signal “neutral” sentiment
The 25% delta skew is a comparison of similar call (buy) or put (sell). This metric will turn negative if “fear” is present because traders anticipate potential downside.
Bullish option traders will be bullish and cause the 25% delta skew indicator’s shift to the negative. Normally, readings between -8 and 8% are considered neutral.
Deribit BTC options 25% delta skew. Source: Laevitas
The chart above shows that options traders have not been overconfident in six months. This would indicate “greed” since the 25% delta skew fell below -8%. The indicator has been hovering around 0 over the past week, indicating balanced risks between bulls and bears.
These findings are not indicative of a lack in confidence among buyers. In fact, it’s quite the contrary. If Bitcoin bulls had been already overconfident at $57,000, there would have been little room for leverage. This could increase the likelihood of a cascading liquidity event.
Bulls are cautiously optimistic. Even a 20% price correction would not change the situation, as the basis rate of the futures market shows a reasonable premium following the rally.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.