China bans Bitcoin (BTC) again.
No, we are not going back in time. On September 24th, the People’s Bank of China (PBoC) released a new package of measures to encourage cross-departmental coordination in the fight against crypto activities. The measures are intended to “cut off payment channels, dispose of the relevant websites and mobile applications in accordance with the law”.
Most investors may have missed the $ 3 billion BTC and $ 1.5 billion Ether (ETH) monthly options expiration less than an hour before the crypto ban news came out. According to “Molly”, a former contributor to Bitcoin magazine, the statements from China were originally published on September 3rd.
However, if a company wanted to take advantage of the negative price spike, it would have made more sense to post the news before it expires on Friday at 8:00 a.m. UTC. For example, the $ 42,000 protective put option became worthless because the Deribit exit price was $ 44,873. This option holder had the right to sell Bitcoin for $ 42,000, but that has no value if the BTC decay occurs above that level.
For the conspiracy theorists out there, the Chicago Mercantile Exchange (CME) bitcoin futures expiration is the average price between 2:00 p.m. and 3:00 p.m. UTC. As a result, the potential open interest of $ 340 million hovered near the $ 42,150 level. In the futures markets, buyers (longs) and sellers (shorts) are brought together at all times, making it virtually impossible to guess which side has the greater firepower.
Bitcoin price at Bitstamp in USD. Source: TradingView
Despite the negative $ 4,000 spike, total liquidations of leveraged long futures contracts were less than $ 120 million. This data should be very worrying for bears as it signals that bulls are not overconfident and are not using extreme leverage.
Professional traders showed some doubts but remained neutral
To analyze how bullish or bearish professional traders are, one should monitor the futures premium – also known as the “base rate”.
The indicator measures the difference between longer-term futures contracts and the current spot market level. In healthy markets, an annualized premium of 5 to 15% is expected, a situation known as contango.
This price gap is caused by sellers charging more money to withhold settlement longer, and a red alert appears when this indicator fades or turns negative, known as “backing up”.
Base rate for 3-month Bitcoin futures contracts. Source: Laevitas.ch
Notice how the sharp decline caused by the negative 9% move on September 24th caused the annualized futures premium to hit its lowest level in two months. The current 6% indicator is at the lower end of the “neutral” range and ended a moderate upward phase that lasted until September 19.
To confirm whether this move was specific to this instrument, one should also analyze the options markets.
Options markets confirm that traders are entering the “fear” zone
The 25% delta skew compares similar call (buy) and put (sell) options. The metric becomes positive when “fear” prevails, as the premium for protective put options is higher than for similar risk call options.
The opposite is true when market makers are bullish, which causes the 25% Delta Skew indicator to shift into negative territory. Readings between minus 8% and plus 8% are usually considered neutral.
Deribit Bitcoin Options 25% Delta Skew. Source: laevitas.ch
The 25% delta skew has been in the neutral zone since July 24th but rose to 10% on September 22nd, suggesting “fear” from options traders. After a brief retest of the neutral 8% level, today’s Bitcoin price action caused the indicator to rise above 11%. Once again, a level last reached two months ago and very similar to the BTC futures markets.
Although the Bitcoin derivatives market showed no signs of declining, professional traders are switching to “fear” mode after today’s drop below $ 41,000. As a result, futures contract traders are reluctant to take leverage long positions, while options markets have a premium for protective put options.
If Bitcoin fails to show strength over the weekend, bears could benefit from the current investor panic.
The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risks. You should do your own research when making a decision.