Bitcoin (BTC), although it has been trending upwards since mid-July is the channel formation that holds $21,100 support, has been trending up ever since. This trend has held for 45 days, and could drive Bitcoin to $26,000 by the end of August.
Bitcoin/USD 12-hour price. Source: TradingView
Bitcoin derivatives data shows that investors are pricing lower odds of a downturn but recent improvements in global economic outlook might surprise bears.
Investors distrust traditional assets because of their correlation. This is especially true when you consider the possibility of recession and tensions between China and the United States ahead of Nancy Pelosi’s trip to Taiwan. CNBC reports that Chinese officials threatened to take legal action if Pelosi did not move forward.
Recent interest rate increases by the U.S. Federal Reserve to reduce inflation created more uncertainty, which limited crypto price recovery. Investors believe in a soft landing, which means that the central bank can gradually reduce its stimulus activities without causing unemployment or recession.
Correlation metric can range from a negative 1 to indicate that certain markets move in opposite directions to a positive 1. This indicates a perfectly symmetrical and perfect movement. The metric 0. would indicate a relationship or disparity between the assets.
S&P 500 and Bitcoin/USD 40 day correlation. Source: TradingView
As shown above, the current 40-day correlation between the S&P 500 (Bitcoin) is 0.72. This has been the norm over the past four months.
Long-term bear market is confirmed by on-chain analysis
Glassnode, a blockchain analytics firm, released its “The Week On Chain”, report on Aug. 1. It highlighted Bitcoin’s weak transactions and the demand to block space. This is similar to the 2018-19 bear markets. This analysis indicates that a trend-breaking pattern is required to signal investor intake.
“Active addresses [14-day moving average] above 950k would indicate an increase in on-chain activity. This could signal potential market strength or recovery.
Blockchain metrics and flows are important but traders also need to track whales and market markers in futures and options markets.
Pro traders don’t seem to be afraid of Bitcoin derivatives metrics
Monthly futures are avoided by retail traders due to the fixed settlement date and price differential from spot markets. Professional traders and arbitrage desks, on the other hand opt for monthly contracts because they do not have a fluctuating funding rate.
Fixed-month contracts trade at a premium to regular spot market prices because sellers are willing to hold settlements longer and demand more money. This is technically known as “contango” but it’s not only for crypto markets.
Annualized premium for Bitcoin 3-month futures. Source: Laevitas
Futures should trade at a premium of 4% to 8.8% annually in healthy markets. This is sufficient to offset the capital costs and the risk of futures. According to the above data, Bitcoin has had a futures premium of 4% or less since June 1. This is not particularly alarming considering that BTC has fallen 52% over the past year.
Trader must also study Bitcoin options markets to exclude externalities that are not specific to futures instruments. The 25% delta skew signal is an indication that market makers and Bitcoin whales are charging too much for protection.
The skew indicator will move higher than 12% if option investors are worried about a Bitcoin price crash. Generalized excitement, however, reflects a negative 12 percent skew.
Bitcoin 30-day options 25 % delta skew Source: Laevitas
Since July 17, the skew indicator was below 12%, which is considered neutral. Options traders are now pricing similar risks for bullish and bearish options. The retest on July 26 of the $20.750 support was not enough to instill fear in derivatives traders.
The Bitcoin derivatives metrics are neutral, despite the rally to $24,500 on July 30. This suggests that professional traders do not believe in a sustained uptrend. Data shows that professional traders would be surprised by a sudden move above $25,000 Although it might seem counter-intuitive right now, a bullish bet creates an interesting risk/reward scenario.
Risk is inherent in every investment or trading move. Before making any investment or trading decision, you should do your research.