The premium on Bitcoin futures reached an 18-month high on July 4. But traders are now questioning whether derivatives metrics reflect “overexcitement” or “reversion to the mean” after a long market the bear.
BTC price gains are limited by regulators, macroeconomics
The price of Bitcoin (BTC) has traded in a narrow 4.4% range since June 22, oscillating between $29,900 and $31,160 as measured by daily closing prices. The lack of a clear trend may be uncomfortable for some, but that is a reflection of the competing drivers currently in play.
For example, investor sentiment was negatively affected by the historic change in the yield curve of the United States Treasury, which reached the highest level on record.
The closely watched inverse spread between two-year and 10-year Treasury notes reached its highest level since 1981, standing at 1.09%. The phenomenon known as yield curve inversion, when shorter-dated Treasury notes trade at higher yields than longer-dated notes, often precedes economic recession.
Related: Fed freezes interest rates, but Bitcoin options data still points to lower BTC price
On the other hand, signs of economic stability in the US have reportedly pushed investors to price the possibility of further interest rate hikes by the central bank to control inflation.
In addition to these macroeconomic distortions, cryptocurrency regulation has also become the focus of investors’ attention of late. Here are some recent examples:
- The exchange Kraken is required by the US District Court for the Northern District of California to provide details of users who have engaged in transactions in excess of $20,000 within a calendar year.
- The Securities and Exchange Commission of Thailand has banned crypto lending services, thereby prohibiting crypto platforms from offering any form of return of deposited crypto to customers.
- The Monetary Authority of Singapore has announced new requirements for crypto service providers to hold customer assets in a fiduciary trust by the end of the year.
So investors may be asking today: Does Bitcoin have the strength to break above the $31,000 resistance? Of course, one has to take a potential economic recession and the increasing regulatory clampdown measures around the world into account first.
Fortunately, Bitcoin futures contract premiums can provide some clues for traders about the market’s next move for the reasons discussed below – as well as the costs of hedging using options on BTC.
The premium on Bitcoin futures has reached an 18-month high
Quarterly Bitcoin futures are popular with whales and arbitrage desks. However, these fixed-month contracts usually sell at a small premium to see markets, indicating that sellers are asking for more money to delay settlement.
As a result, BTC futures contracts in healthy markets must trade at a 5 to 10% annual premium – a situation known as contango, which is not unusual in crypto markets.
Demand for leveraged BTC longs increased significantly last week, as the futures contract premium jumped to 6.4% on July 3 from 3.2% the previous week. Besides reaching the highest level in 18 months, the metric finally moved into neutral-to-bullish territory.
Related: Here’s what’s happening in crypto today
To check market sentiment, it is also helpful to look at options markets, as the 25% delta skew can check if price stagnation has made investors less optimistic. It reveals whether arbitrage desks and market makers are charging higher prices for protection against reversals or bearish moves.
In short, when traders expect a drop in the price of Bitcoin, the skew metric rises above 7%, while periods of excitement usually have a negative 7% skew.
The 25% delta skew metric experienced a complete reversal, indicating the strong momentum gained on June 21 when it fell below negative 7%. As the price of Bitcoin rose back to $30,000, the indicator continued to improve, culminating in “greedy” with a negative 13% skew on July 2.
Moderate optimism is “healthy” for the Bitcoin market
Generally, a 6.4% futures basis and a negative 13% delta skew would be considered moderately bullish. However, considering analysts estimate a 50% chance for the approval of BlackRock’s spot Bitcoin exchange-traded fund (ETF), these metrics may appear conservative. But a certain amount of skepticism is good for buyers who use derivatives contracts and avoid the risk of cascading liquidations.
Related: Bitcoin ETF race begins: Has institutional confidence in crypto returned?
At the moment, macroeconomic factors and regulatory uncertainty probably explain the restrained optimism for BTC derivatives despite the many ETF requests from the world’s largest asset managers.
So aside from the 18-month high, the current Bitcoin futures premium remains relatively modest compared to previous instances of over-optimism, such as the 19% premium in October 2021.
Therefore, the current 6.3% futures premium represents a healthy market as opposed to 10% or higher which indicates excessive optimism or euphoria. In addition, traders should remain confident given that the bulls have room to increase the exploitation of long positions without much risk.
This article does not constitute investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.