Bitcoin had underperformed most altcoins for the past two months, but that trend was reversed when its market cap broke the $ 1 trillion mark on October 6 on its 20% rally. That brought investor attention back to the leading cryptocurrency and altcoins are currently in the red for the day.
The current positive momentum could become dangerous if Bitcoin (BTC) traders get too confident and abuse leverage to open long positions. To avoid this, traders need to carefully analyze derivatives markets to eliminate this risk.
Top 14 coins weekly performance. Source: CoinMarketCap
Notice above how the altcoin market cap increased 5.8% while Bitcoin grew 20.8% over the same period. In fact, there were some outliers like Shiba Inu (SHIB), which rose 200%, Fantom (FTM), which rose 60%, and Klaytn (KLAY), which rose 36%. However, the aggregate market capitalization of altcoins did not track the performance of bitcoin.
Some well-known personalities have spoken up, like billionaire Wall Street investor Bill Miller, who recently expressed his optimism about Bitcoin while also voicing concerns about most of the altcoin projects. Miller explicitly mentioned the involvement of the “big banks” and referred to “huge amounts” of venture capital flowing into Bitcoin.
The recent Bitcoin frenzy appears to be driven by the macroeconomic scenario. The United States raised its debt ceiling by $ 480 billion to meet its obligations by early December. Inflationary pressures from endless stimulus packages and meager interest rates fueled the long rally in commodities.
For example, oil hit its highest level in seven years and wheat futures recently hit a record high that has not been seen since February 2013. Even the S&P Case-Shiller House Price Index was up 23.3% annualized.
To understand if bitcoin traders were overly excited, traders should analyze bitcoin’s derivative indicators such as futures markets premium and option offset.
The futures premium shows that traders are slightly optimistic
The base rate measures the difference between longer-term futures contracts and the current spot market level. This indicator is often referred to as the futures premium.
Bitcoin 3-month futures on an annual basis. Source: Laevitas
In healthy markets, an annualized premium of 5 to 15% is expected, a situation known as “contango”. This price difference is caused by sellers asking for more money in order to withhold settlement longer.
The recent 20% Bitcoin price rally has caused the indicator to hit the upper bound of this neutral zone, which means that investors are optimistic but not yet too confident. Whenever buyers demand excessive leverage, the base rate can easily exceed 25% as seen in mid-May.
In order to rule out external effects specific to the futures instrument, one should also analyze options markets.
Bitcoin options signal a “neutral” sentiment
The 25% delta skew compares similar call (buy) and put (sell) options. This metric becomes positive when “fear” prevails as traders expect potential downward movements.
The opposite is true when options traders are bullish, which causes the 25% Delta Skew indicator to shift into negative territory. Readings between -8% and + 8% are usually considered neutral.
Deribit BTC Options 25% Delta Skew. Source: Laevitas
The graph above shows that there hasn’t been a single case in the past six months where options traders have become overconfident, which would signal “greed” as the delta skew fell from 25% to below -8%. Meanwhile, the indicator hovered near 0 for the past week, showing a balanced risk between bears and bulls.
These results necessarily show a lack of buyer confidence, but it is just the opposite. Had Bitcoin bulls been overconfident at $ 57,000, there would be little room for additional leverage, which would increase the risk of cascading liquidation in the event of a temporary price correction.
The bulls are modestly confident and even a 20% correction is unlikely to change the situation as the futures market base rate is reasonably priced after the recent rally.
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.