On Sept. 6, a surprise price correction of $860 took Bitcoin (BTC), from $19,820 up to $18,960 in just two hours. This movement caused $74million in Bitcoin derivatives exchange liquidations, the largest in nearly three weeks. The current $18,733 level represents a 24% correction to the $25,000 rally on Aug. 15.
Bitcoin/USD 30-min price. Source: TradingView
It’s worth noting that Bitcoin traded at $19,800 in less than an hour after a 2% move towards $20,200. The price action of Ether (ETH) was more interesting. It gained 7% in 48 hours before the market correction.
You can dismiss any conspiracy theories about investors shifting their positions to favor altcoins. Ether fell 5.6% on Sept. 6, while Bitcoin’s $860 drop represents a 3.8% increase.
Since August 27, comments by U.S Federal Reserve Chair Jerome Powell were followed by a $1.25 billion loss in U.S stocks in a single-day. Powell stated that higher interest rates were still possible, leading to the S&P 500 closing down 3.4% on the Jackson Hole Economic Symposium.
Let’s look at the data on crypto derivatives to see if investors are pricing down a downturn.
Since last week, pro traders have been bearish
Because of the price differential from spot markets, retail traders tend to avoid quarterly futures. Professional traders still prefer them because they avoid the fluctuation in funding rates that can often occur in perpetual futures contracts.
Annualized premium for Bitcoin 3-month futures. Source: Laevitas
To cover costs and other risks, an indicator should trade at a premium of 4% to 8.8% annually in healthy markets. Because the Bitcoin futures premium was below 3%, it is safe to say that derivatives traders were neutral to bearish over the past month. This data shows professional traders’ inability to add leveraged bull (long) positions.
To exclude any externalities that are specific to Bitcoin options markets, one must also examine them. The 25% delta skew, for example, is a sign that arbitrage desks and market makers are charging too much for protection.
Bitcoin 30-day options 25 % delta skew Source: Laevitas
Options investors are more likely to be able to predict a price dump in bear markets. This causes the skew indicator above 12%. Bullish markets, on the other hand, tend to lower the skew indicator below negative 12 percent, which means bearish put options can be discounted.
Since Sept 1, the 30-day delta skew was above the threshold of 12%, which indicated that options traders were less likely to offer downside protection. These two metrics indicate that the Bitcoin price drop on Sept. 6 may have been partly anticipated, explaining the low impact on liquidations.
Comparatively, $210 million worth leveraged long (buyers), liquidations were caused by the $2,500 Bitcoin plunge on Aug. 18. However, prevailing bearish sentiment doesn’t necessarily mean adverse price action. Whales and market markers tend to be less likely to add leverage longs or offer downside protection by using options.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.
Eileen Wilson –Technology and Energy
My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of topmagazinewire.com with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.