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As traders minimize leveraged long positions, BTC derivatives statistics show no bottom in sight.

16-Jun-2022 By: Sudeep Saxena
As traders minimize

As traders minimize leveraged long positions, BTC derivatives statistics show no bottom in sight.

Is it time to indulge in some self-indulgence? As the price of bitcoin fell to $22,600, experienced market makers and arbitrage desks were extremely risk apprehensive.

Following worsening macroeconomic conditions, Bitcoin (BTC) lost the $28,000 support on June 12. On June 10, the yield on the US Treasury 2-year note reached 3.10 percent, its highest level since December 2007. This demonstrates that traders are asking higher rates to keep their debt instruments, implying that inflation will continue to be a problem.

According to Louis S. Barnes, a senior loan officer at Cherry Creek, the mortgage-backed securities (MBS) markets had no buyers as the US posted its greatest inflation in 40 years.

Raised alerts are used by MicroStrategy and Celsius leverage.

The recent sell-off in bitcoin is putting more pressure on the cryptocurrency market, and various media outlets are debating whether MicroStrategy, a Nasdaq-listed analytics and business intelligence company, and its $205 million Bitcoin-collateralized loan with Silvergate Bank will contribute to the current crypto crash. The interest-only loan was made on March 29, 2022, and it was backed by Bitcoin held in a mutually authorised custodian's account.

According to Microstrategy's chief financial officer Phong Le's earnings call on May 3, if Bitcoin fell to $21,000, extra margin would be necessary. Michael Saylor stated on May 10 that the whole 115,109 BTC position could be committed, lowering the liquidation to $3,562.

Finally, on June 13, cryptocurrency staking and lending platform Celsius halted all network withdrawals. As the project shifted huge quantities of wBTC and Ether (ETH) to avoid liquidation at Aave (AAVE), a popular staking and lending site, rumours of insolvency immediately surfaced.

In August 2021, Celsius announced that it had surpassed $20 billion in assets under management, which was more than enough to trigger a doomsday scenario. While there is no way of knowing how this liquidity issue will play out, it came at the worst possible time for Bitcoin investors.

Bitcoin futures metrics are on the verge of turning negative.

On June 13, Bitcoin's major derivatives gauge, the futures market premium, temporarily fell below zero. The statistic compares the price of longer-term futures contracts to the price of a regular spot market.

These fixed-calendar contracts frequently trade at a modest premium, indicating that sellers are asking for more money in order to delay settlement. As a result, in healthy markets, the three-month futures should trade at a 4 percent to 10% annualised premium, a scenario known as contango.

When that indicator starts to fade or goes negative (backwardation), it's a warning sign that bearish sentiment is prevalent.

A sour derivatives market is a warning flag.

Traders should look at Bitcoin's option price to see if the crypto market structure has deteriorated any further. The 25 percent delta skew, for example, compares equivalent call (buy) and put (sell) options. When fear is prominent, this metric will turn positive since the premium for protective put options is higher than for similar risk call options. When greed is the dominant emotion, the 25 percent delta skew indicator shifts to the negative side.

The 26.6 peak on June 13 was the highest measurement ever recorded, and readings between negative 8% and positive 8% are normally considered neutral. Even for March 2020, when oil futures fell to negative territory for the first time in history and Bitcoin fell below $4,000, this resistance to pricing downside risks is extraordinary.

Despite the incredibly cheap cost, the major message from Bitcoin derivatives markets is that experienced traders are unwilling to increase leverage long bets. Furthermore, the absurd price gap for put (sell) options pricing demonstrates that the June 13 crash to $22,600 surprised even experienced arbitrage desks and market markers.

Those looking to "buy the dip" or "catch a falling knife" should wait until derivatives metrics indicate that the market structure has improved before attempting to "catch a falling knife." As the 25 percent delta skew recovers to 10% or lower, the BTC futures premium must restore the 4% level, and the options markets must find a more balanced risk assessment.

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