Bitcoin futures premium hit an 18-month high on July 4. But traders are now wondering if the derivatives metrics indicate “over-excitement” or a “return to mean” after an extended bear market.
BTC price increases are being capped by regulators and macroeconomics
Bitcoin (BTC) price has been trading in a tight 4.4% range since June 22, oscillating between $29,900 and $31,160 based on daily closes. The lack of a clear trend may be uncomfortable for some, but that is a reflection of the opposing drivers currently in play.
For example, investor sentiment was negatively impacted by the historic inversion of the US Treasury yield curve, which reached its highest level on record.
Spread between 10-year and 2-year US Treasuries. Source: Real Investment Advice
The closely watched inverted spread between 2-year and 10-year Treasury bills has reached its highest level since 1981 at 1.09%. The phenomenon known as “yield curve inversion”, in which shorter-dated government bonds trade at higher yields than longer-dated government bonds, usually precedes economic recessions.
Related: The Fed Suspends Rates, But Bitcoin Options Data Still Points to a Decline in BTC Price
On the other hand, signs of strength in the US economy have reportedly prompted investors to price in the possibility of further interest rate hikes by the central bank to keep inflation under control.
In addition to these macroeconomic distortions, cryptocurrency regulation has also been the focus of investor attention lately. Here are just a few recent examples:
- The Kraken exchange has been ordered by the US District Court for the Northern District of California to provide information on users who transacted more than $20,000 in a calendar year.
- Thailand’s Securities and Exchange Commission has banned crypto lending services, thereby banning crypto platforms from offering any form of return on cryptos deposited by customers.
- The Monetary Authority of Singapore announced new requirements for crypto service providers to place customer assets in a statutory trust by the end of the year.
As such, investors are probably now wondering: does bitcoin have the power to break the $31,000 resistance? Of course, one must first consider a potential economic recession and increasing regulatory crackdown around the world.
Luckily, the premiums of bitcoin futures contracts can give traders some clues as to where the market is going next for reasons explained below – as well as the cost of hedging using BTC options.
Bitcoin futures premium hits an 18-month high
Quarterly bitcoin futures are popular with whales and arbitrage desks. However, these fixed-month contracts typically trade at a slight premium to spot markets, suggesting sellers are asking for more money to delay settlement.
As a result, in healthy markets, BTC futures contracts should trade at a 5% to 10% annual premium — a situation known as contango, which isn’t unique to crypto markets.
Annualized Bitcoin 3 Month Futures Premium. Source: Laevitas
Demand for leveraged long BTC has increased significantly over the past week as the futures contract premium rose to 6.4% on July 3 from 3.2% a week earlier. Not only has the indicator reached its highest level in 18 months, it has finally moved into neutral to bullish territory.
Related: Here’s what happened in crypto today
To further gauge market sentiment, it’s also helpful to look at options markets, as the 25% delta skew can gauge whether price stagnation has made investors less optimistic. It shows when arbitrage desks and market makers are asking higher prices to protect against up or down moves.
In short, when traders are expecting the Bitcoin price to fall, the skew metric will rise above 7%, while exciting times usually have a negative skew metric of 7%.
Bitcoin 30-day options 25% delta skew. Source: Laevitas
The 25% Delta Skew metric saw a complete reversal, suggesting that bullish momentum was picking up on June 21 when it fell below minus 7%. As bitcoin price climbed back above $30,000, the indicator continued to improve, culminating in “greed” with a negative 13% deviation on July 2nd.
Moderate optimism “healthy” for Bitcoin market
Typically, a futures basis of 6.4% and a negative delta skew of 13% would be considered moderately bullish. However, given that analysts are estimating a 50% chance of BlackRock’s approval of the spot bitcoin exchange-traded (ETF) fund, these metrics could be viewed as conservative. However, a certain level of skepticism is actually healthy for buyers using derivative contracts and avoids the risk of cascading liquidation.
Related: Bitcoin ETF Race Begins: Has Institutional Confidence in Cryptocurrency Returned?
For now, macroeconomic factors and regulatory uncertainty are likely to explain the suppressed optimism for BTC derivatives despite multiple ETF requests from the world’s largest asset managers.
Aside from the 18-month highs, the current premium for bitcoin futures remains relatively modest compared to previous instances of excessive optimism, such as the 19% premium in October 2021.
Thus, today’s futures premium of 6.3% represents a healthy market, while 10% or more suggests excessive optimism or euphoria. Additionally, traders should remain confident as the bulls have scope to continue adding to their long positions without taking on undue risk.
This article does not contain any investment advice or recommendations. Any investment and trading venture involves risk, and readers should do their own research when making their decision.
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