Bitcoin's Market Balancing Act

Martin Walker
Sep 13, 2023 at 07:37 am

Bitcoin, the enigmatic digital asset, recently embarked on a remarkable journey, surging by a notable 5%. This surge was triggered after it put the $25,000 support level to the test on the fateful day of September 11th. However, it's imperative to tread carefully, for this upward momentum doesn't unequivocally signify a resounding victory for the bullish faction.

To offer a broader perspective on the current state of affairs, it's worth mentioning that Bitcoin has faced a rather tumultuous period, witnessing a substantial 15% decline since the advent of July. In stark contrast, traditional stalwarts like the S&P 500 index and the age-old haven asset, gold, have managed to maintain a semblance of stability throughout this turbulent ride.

This intriguing underperformance underscores Bitcoin's ongoing struggle to gather the much-needed momentum, despite the existence of significant catalysts. Notably, these catalysts include MicroStrategy's ambitious plan to acquire an additional $750 million worth of BTC and the persistent requests for Bitcoin spot exchange-traded funds (ETFs) from colossal trillion-dollar asset management firms.

However, amid this complex landscape, Bitcoin derivatives traders remain resolutely optimistic. They firmly believe that the $25,000 level has etched itself as a formidable bottom, thereby opening up intriguing possibilities for further price upswings.

Comparison of Bitcoin/USD against gold and S&P 500 futures over a 12-hour time frame, sourced from TradingViewComparison of Bitcoin/USD against gold and S&P 500 futures over a 12-hour time frame, sourced from TradingView  

Some astute observers argue that Bitcoin's primary driving forces for the impending year of 2024 remain firmly in place. These driving forces chiefly encompass the tantalizing prospects of a spot ETF and the gradual reduction in new supply following the eagerly anticipated April 2024 halving event. Additionally, it's noteworthy that certain immediate perils looming over the cryptocurrency markets have somewhat abated. This follows the United States Securities and Exchange Commission's recent experiences of partial setbacks in three distinct legal cases, involving notable entities like Grayscale, Ripple, and the decentralized exchange Uniswap.

On the flip side, the bearish camp boasts its own set of advantages, casting shadows over the prevailing optimism. This includes the ongoing legal tussles involving leading exchanges such as Binance and Coinbase. Furthermore, there's a cloud of financial uncertainty looming over Digital Currency Group, triggered by the bankruptcy declaration of one of its subsidiaries back in January 2023. This conglomerate is weighed down by a colossal debt load exceeding a staggering $3.5 billion, a predicament that could potentially pave the way for the sale of funds managed by Grayscale, including the esteemed Grayscale Bitcoin Trust.

To delve deeper into the prevailing market conditions, let us dissect the derivatives metrics.

Metrics related to Bitcoin futures and options remained stable despite the market correction

In the world of Bitcoin futures and options, metrics have remarkably managed to hold their ground, displaying resilience amidst the recent market correction. Bitcoin's monthly futures contracts typically exhibit a slight premium when compared to spot markets. This premium suggests that sellers are inclined to demand a higher price for postponing the settlement of their contracts. Consequently, BTC futures contracts are ideally expected to trade within a range of 5% to 10% in annualized premium, a phenomenon colloquially known as contango. This phenomenon isn't unique to the realm of cryptocurrency; it resonates across various markets.

The annualized premium of Bitcoin's 1-month futures, sourced from LaevitasThe annualized premium of Bitcoin's 1-month futures, sourced from Laevitas  

It's pertinent to note that the demand for leveraged BTC long and short positions through futures contracts didn't exert significant influence when the price dipped below the $25,000 threshold on that fateful September 11th. Nevertheless, the BTC futures premium continues to hover just below the neutral 5% threshold, a telling sign of the absence of fervent demand for leveraged long positions.

For a more profound insight into market sentiment, we turn our gaze towards the options markets. Here, the 25% delta skew emerges as a crucial metric, offering us a window into the evolving sentiments of investors. In essence, if traders anticipate a decline in Bitcoin's price, the skew metric will ascend beyond the 7% mark, while periods of exuberance typically manifest with a -7% skew.

The 25% delta skew for Bitcoin's 30-day options, as provided by LaevitasThe 25% delta skew for Bitcoin's 30-day options, as provided by Laevitas  

Interestingly, the landscape underwent a notable shift on that eventful September 11th. The 25% delta skew metric, which had previously signaled a 9% premium on protective put options, indicative of investor expectations of an impending correction, has now found its equilibrium at zero. This equilibrium suggests a balanced pricing scenario between call and put options, hinting at an equal likelihood of both bullish and bearish price movements.

While macroeconomic uncertainty leans towards the bearish side, Bitcoin bulls continue to maintain their confidence

In the backdrop of macroeconomic uncertainties, particularly with the imminent release of the Consumer Price Index report on September 13th and retail sales data on September 14th, cryptocurrency traders are likely to tread cautiously. Many may prefer a "return to the mean" strategy, seeking refuge within the confines of the predominant trading range that has prevailed over the past couple of weeks, ranging from $25,500 to $26,200.

From a bullish vantage point, the resilience displayed by derivatives markets during the dip below the $25,000 mark is indeed a promising beacon. In simpler terms, had the bears held stronger convictions, one would expect a heightened appetite for put options and a negative BTC futures premium, a phenomenon known as "backwardation."

In conclusion, both the bullish and bearish camps possess significant triggers capable of influencing Bitcoin's price trajectory. However, the timing of key events such as court rulings and ETF decisions remains shrouded in uncertainty. It is this dual layer of unpredictability that likely explains the steadfast resilience observed in derivatives metrics. Both sides of the spectrum exercise caution to mitigate the perils of overexposure in this ever-evolving crypto landscape.

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