This week Bitcoin (BTC) reached a 2023 high of $23,100 and the move followed a remarkable recovery in traditional markets, especially the tech-heavy Nasdaq Composite Index, which gained 2.9% on January 20.
Economic data continues to bolster investors’ hopes that the US Federal Reserve will reduce the pace and duration of interest rate hikes. For example, sales of previously owned homes fell 1.5% in December, the 11th consecutive decline after high mortgage rates in the United States hit demand hard.
On January 20, Google announced that 12,000 workers had been laid off, more than 6% of its global workforce. The bad news continues to trigger buying activity in risky assets, but Dubravko Lakos-Bujas, chief US equity strategist at JPMorgan, expects weaker earnings guidance to “put downward pressure” on the stock market.
Recession fears rose on January 20 after Federal Reserve Governor Christopher Waller said a soft recession should be tolerated if it means lowering inflation.
Some analysts have linked Bitcoin’s gains to Digital Currency Group filing for Chapter 11 bankruptcy protection – allowing the troubled Genesis Capital to seek the reorganization of debts and its business activities. But, more importantly, the move lessens the risk of a fire sale on Grayscale Investments’ assets, including the $13.3 billion Grayscale GBTC trust fund.
Let’s take a look at derivative metrics to better understand how professional traders are positioned in the current market conditions.
Bitcoin margin fell long after the pump to $21,000
Margin markets provide insight into how professional traders are positioned as it allows investors to borrow cryptocurrency to leverage their positions.
For example, one can increase exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only short the cryptocurrency because they are betting that its price is going down. Unlike futures contracts, the balance between edge lengths and shorts does not always match.
The chart above shows that the margin lending ratio of OKX traders increased from January 12th to January 16th, signaling that professional traders increased their leverage while Bitcoin gained 18%.
However, the indicator reversed its trend as the excess leverage, 35 times greater for buying activity on January 16th, retreated to a neutral-to-bullish level on January 20th.
Currently at 15, the metric favors stablecoin borrowing by a wide margin and indicates that shorts are unsure about building bearish positions.
However, such data do not explain whether professional traders became less bullish or decided to reduce their leverage by depositing additional margin. Therefore, one must analyze options markets to understand if the sentiment has changed.
Options traders are neutral despite the recent rally
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 short, 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 reached its lowest level in over 12 months on January 15th. Options traders finally paid a premium for bullish strategies instead of the opposite.
Related: Genesis bankruptcy case scheduled for first hearing
Currently, at minus 2%, the delta swing signals that investors assess similar probabilities for bull and bear cases, which is a little less optimistic than expected considering the recent rally to $22,000.
Derivatives data puts the bullish case in check as buyers using stablecoin margin have significantly reduced their leverage and options markets assess similar risks for both sides. On the other hand, bears have not found a level where they would be comfortable opening short positions by borrowing Bitcoin on edge markets.
Traditional markets continue to play a crucial role in setting the trend, but Bitcoin bulls have no reason to fear as long as derivative metrics remain healthy.
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