Bitcoin price bounces to $41.5K, but derivatives data shows traders lack confidence

Bitcoin (BTC) fell to $39,650 on Monday, indicating a 42.6 percent drop from the all-time high recorded on Nov. 22, 2021. Some suggest that a “crypto winter” has already begun, noting the liquidation of $2.1 billion in leveraged-long aggregate crypto futures contracts in the last seven days.

The descending trend that has guided Bitcoin’s dismal performance for the past 63 days suggests that prices will fall below $40,000 by February.

After the United States Federal Reserve’s December Federal Open Market Committee session on Jan. 5, investor confidence continued to erode. In 2022, the monetary policy authority stated its intention to reduce its balance sheet and raise interest rates.

Kazakhstan’s political upheaval added to market pressure on January 5. Due to protests, the country’s internet was shut down, forcing Bitcoin’s network hashrate to drop 13.4 percent.

Futures traders are still neutral

The futures premium, also known as the “basis rate,” can be used to determine how optimistic or bearish professional traders are.

The disparity between longer-term futures contracts and current market levels is measured by this indicator. In robust markets, a 5-to-15 percent yearly premium is predicted, which is referred to as “contango.”

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This price difference is generated by sellers requesting more money in order to defer settlement for longer, and a red signal appears once this indicator fades or turns negative, a circumstance known as “backwardation.”

It’s worth noting that the futures market premium hasn’t fallen below 7% in the last few months. Given the lack of Bitcoin price strength throughout this time, this is a fantastic indicator.

Options traders are not as bullish

To rule out futures-specific externalities, one need also look into the options markets.

The 25 percent delta skew compares call (buy) and put (sell) options that are similar. 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.

Neutral readings are those that fall within the negative and positive 8% range. On Dec. 6, 2022, the 25 percent delta skew indicator entered the “fear” category at 10% for the first time.

As a result, because the indicator is currently at 8%, options market traders are on the cusp of a neutral-to-bearish mindset. Furthermore, because purchasing protective put options is getting increasingly expensive, market makers and arbitrage desks are doubtful that $39,650 was the bottom.

Overall, the mood is bleak, and the $2.1 billion in aggregate futures contract liquidations indicate that derivatives traders’ longs (buyers) are rapidly losing faith. Only time will tell where the precise bottom is, but there is currently no sign of substantial support from professional traders.