For the past 17 days, Bitcoin (BTC) price has traded within a tight 8.5% range from $27,250 to $29,550, causing the 40-day volatility gauge to fall below 40%. This wasn’t limited to cryptocurrencies, as historical volatility for the S&P500 index hit 17%, its lowest level since December 2021.
But will $28,000 become the new resistance? Not according to the latest bitcoin futures and options data. Nonetheless, macroeconomic conditions remain the main driver of price volatility in risky markets over the short to medium term.
BTC price is flattening as investors lose risk appetite
There are myriad reasons that could explain the relatively small price volatility in risk markets, including anticipation of a recession, investors unwilling to place new bets until the Federal Reserve completes its rate hikes, or heightened demand (and concentration ) on fixed-income securities income transactions.
The problem is that no one can prove what prompted investors to limit their risk appetite and push Bitcoin’s price sideways. Many fear commercial real estate is a growing problem that could cause major turmoil — including billionaire fund manager Warren Buffett.
While some believe that the US debt ceiling discussion and the banking crisis could further cement the weakening of the US dollar, Buffett sees no alternatives. The finance mogul is a longtime critic of the precious metal gold, as his investment thesis prioritizes high-yield investments.
The debt ceiling drama has prompted Treasury Secretary Janet Yellen to warn that if Congress doesn’t act in the next few weeks, a “precipitous economic downturn” would follow.
On the one hand, the government is under pressure to maintain economic activity and contain the banking crisis. Eventually, raising the debt ceiling will add liquidity to the markets and further fuel inflation.
This complex environment of inflationary risks, an economic downturn and a weakening US dollar may have caused investors to lose interest in risky assets and focus their bets on trading fixed income as interest rates have risen in excess of 5% per year.
An alarming sign for Bitcoin would be a negative futures contract premium or increased cost of hedging with options. For this reason, investors should keep a close eye on these BTC derivatives metrics.
Bitcoin futures show weak demand from longs
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.
Bitcoin 2 Month Futures Annualized Premium. Source: Laevitas.ch
Bitcoin traders have been extremely cautious over the past two weeks. Even during the recent rally towards $29,850 on May 6th, there was no increase in demand for leveraged longs. Additionally, the subsequent 6.8% correction to $27,800 has brought the BTC futures premium to its lowest level in two months at 1.5%.
The bitcoin options risk metric remained neutral
Traders should also analyze options markets to understand if the recent correction has caused investors to become more optimistic. The 25% delta skew is a telling sign when arbitrage desks and market makers overcharge for upside or downside protection.
In short, when traders are anticipating a bitcoin price decline, the skew metric will rise above 7% and periods of excitement tend to have a negative 7% skew.
Related: “Bitcoin Not Under Attack:” BTC Maxis Allay Fears of DoS Offensive
Bitcoin 30-Day Options 25% Delta Skew: Source: Laevitas
As illustrated above, the 25% options delta skew has recently been flirting with excessive optimism as the protective put options traded at a 7% discount on May 7th compared to similar neutral to bullish call options.
Still, the trend quickly reversed as bitcoin price tested levels below $28,000. Currently, this is a balanced risk appetite according to the BTC option price as the 25% Delta Skew indicator is near 0%.
Bitcoin options and futures markets suggest that professional traders are less confident and prefer sideways trading. Therefore, traders should not turn bearish on weaker derivative indicators.
In other words, if there was enough conviction that $28,000 would become resistance, one would expect a much higher appetite for risk-averse put options and a negative BTC futures premium, or “backwardation.”
This article does not contain any investment advice or recommendation. Every investment and trading move involves risk and readers should do their own research when making a decision.
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