Is the bottom in? Data shows Bitcoin derivatives entering the ‘capitulation’ zone

Analysts love to make price predictions, and nine out of ten times they are wrong. How many times have analysts said that Bitcoin would never reach X price again, only for it to plummet a few months later.

It doesn’t matter how knowledgeable a person or how well connected they are in the industry. Bitcoin’s (55% volatility) must be considered and altcoins will suffer more from capitulation-like movements.

It was a mistake that I made about the potential loss of crypto due to macro contagion. I am still bullish on the whole space and believe it to be the most important mega-trend in our time. I joined CT in 2018 and will continue to be with you guys over the next year, bull or bear.
Zhu Su (@zhusu), January 24, 2022

The case involves Zhu Su’s Three Arrows Capital, which purchased $676.4 million of Ether (ETH), on Dec. 7. This was after the price dropped 20% in 48 hours. Zhu even said that he would continue buying “any panic dump”, despite the fact that Ethereum fees are unsuitable for most users.

Let’s look at Bitcoin’s options and futures market data to see if there’s still a demand for bearish bets, and how the pros are positioned.

Futures traders refuse to shorten

Basis indicators measure the difference between current spot market levels and longer-term futures contracts. In healthy markets, a 5% to 15% annualized price premium can be expected. This is due to sellers asking for more money to delay settlement.

A red alert is issued if the indicator turns negative or fades, which is known as “backwardation.”

Basis rate for 3-month Bitcoin futures. Source: Laevitas.ch

The indicator held the threshold at 5% despite the 52% price fall in 75 days. If pro traders had entered bearish positions, then the basis rate could have been closer to zero or even negative. Data shows that there is a shortage of interest in short positions during the current correction phase.

Options traders remain in the “fear zone”

Trader should also look at the options markets to exclude externalities that are not specific to futures instruments. The 25% delta skew is a comparison of similar call (buy) or put (sell) options. This metric will be positive if fear is present, as the protective put options premium for similar risk options is higher than other options.

When greed is rampant, the 25% delta-skew indicator will shift to the negative.

Bitcoin 30-day Options 25% Delta skew Source: Laevitas.ch

As it crossed above 10%, the 25% skew indicator moved to the “fear” area. The 17% peak was last seen in July 2021. Bitcoin traded at $34,000 then.

This indicator could be considered bearish considering arbitrage desks, market makers and other market participants are charging too much for downside protection. This indicator is still forward-looking and often predicts market bottoms. Two weeks after the skew indicator reached 17%, Bitcoin’s price dipped to $29,300.

Not as relevant is the correlation with traditional markets

It is important to note that Bitcoin has been in a downtrend over the past 75 days. This is prior to the Federal Reserve’s tightening rhetoric on Dec. 15. The increased correlation with traditional markets is not the reason why the S&P 500 index peaked Jan. 4, but Bitcoin was already down 33% from its $69,000 high.

Bitcoin is a safe bet considering the inability of bears to short BTC below $40,000, and the surrender of options traders.

Additionally, Bitcoin futures liquidation in the last week was $2.35 Billion, which has significantly reduced buyers’ leverage. Although there is no guarantee that $32,930 will be the last bottom, short sellers may wait for a rebound before entering bearish positions.

Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.

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Eileen Wilson

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.

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