Bitcoin (BTC) has been trading near $16,500 since November 23, recovering from a drop to $15,500 as investors feared the imminent insolvency of Genesis Global, a cryptocurrency lending and trading company. Genesis stated on November 16 that it will “temporarily suspend redemptions and new loan originations in the loan business.”
After causing initial turmoil in the markets, the company refuted speculation of “imminent” bankruptcy on November 22, although it confirmed difficulties in raising money. More importantly, the parent company of Genesis Digital Currency Group (DCG) owns Grayscale – the asset manager behind Grayscale Bitcoin Trust, which holds approximately 633,360 BTC.
Contagious risks from the implosion of FTX-Alameda Research continue to put negative pressure on the markets, but the industry is working to improve transparency and insolvency risks. For example, on November 24, the crypto derivatives exchange Bybit launched a $100 million fund to help market makers and high-frequency trading institutions struggling with financial or operational difficulties.
More recently, on November 25th, Binance released proof of funds backed by Merkle Tree for its Bitcoin deposits. In addition, the exchange outlined how users can use the mechanism to control their holdings. There is no doubt that centralized institutions must embrace transparency and assurance mechanisms to regain investor confidence.
First, however, one must analyze Bitcoin derivatives markets to fully understand how professional traders digest such news.
Futures market discount has improved slightly but remains far from bullish
Fixed-month futures contracts typically trade at a slight premium to regular spot markets because sellers require more money to hold a settlement longer. Technically known as contango, this situation is not exclusive to crypto assets.
In healthy markets, futures should trade at a 4% to 8% annual premium, which is enough to offset the risks plus the cost of capital. The opposite, when the demand for bearish bets is exceptionally high, causes a discount on futures markets – known as backwardation.
Given the above data, it is clear that derivatives traders reversed bearish on November 9, as Bitcoin futures premiums reversed negative. However, according to futures markets, the $15,500 decline on November 21 was not enough to spur further demand for leveraged short positions.
Options markets confirm the bearishness
Traders should analyze options markets to understand if Bitcoin is likely to retest the $15,500 support. The 25% delta tilt is a telltale sign whenever arbitrage desks and market makers overload for upside or downside protection.
The indicator compares similar call (buy) and put (sell) options and will turn positive when fear prevails, as the protective put option premium is higher than risky call options.
In summary, the skew metric will move above 10% if traders fear a Bitcoin price crash. On the other hand, generalized excitement reflects a negative 10% deviation.
As shown above, the 25% delta tilt has been above the 10% threshold since November 9, indicating that options traders are assessing a higher risk of unexpected price reversals. Currently at 18%, it signals that investors are shy and reflects a lack of interest in offering downside protection.
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A surprise pump will probably cause more of an effect
Given that both Bitcoin futures markets and options markets are currently estimating higher downside probabilities, there is no reason to believe that a potential retest of the $15,500 bottom would cause massive liquidations.
Furthermore, the slight reduction in the futures discount shows that bears lack the confidence to open leveraged shorts at current price levels. Although Bitcoin derivatives data remains bearish, the surprise of an eventual bull run to $18,000 is likely to cause more damage. But, for now, bears remain in control on BTC futures and options data.
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