Data about BTC Options suggests price rally could still have strength, even as economic concerns grow and the possibility of the crypto market stalling for a short time.
Bitcoin this week hits a 2023 high of $23,100, following a notable rally in traditional markets, notably the Nasdaq Composite Index, which gained 2.9% on Jan. 20.
Economic data continues to fuel investors’ hopes that the US Federal Reserve will reduce the pace and duration of interest rate hikes. For example, home sales fell 1.5% in December, the 11th consecutive decline as US mortgage rates impacted demand heavily.
On January 20, Google announced it was laying off 12,000 workers, more than 6% of its global workforce. Bad news continues to spur risky asset purchases, but U.S. chief Dubravko Lakos-Bujas JPMorgan’s equity strategist, he expects weaker earnings guidance to “put downward pressure” on the stock market.
Fears of a recession increased after Federal Reserve Governor Christopher Waller said on Jan. 20 that a soft recession should be tolerated if it means reducing inflation.
Some analysts attributed Bitcoin’s rally to Digital Currency Group filing for Chapter 11 bankruptcy protection — allowing troubled Genesis Capital to try to reorganize its debts and businesses. But more importantly, the move reduces the risk of a buy-out of Grayscale Investments’ assets, including the $13.3 billion Grayscale GBTC trust fund.
Let’s take a look at derivatives metrics to better understand how professional traders fare in current market conditions.
Bitcoin’s long margins fell after the $21,000 pump
Margin markets provide insight into where professional traders position themselves, as they allow investors to borrow cryptocurrencies to grow their positions.
For example, one can increase exposure by borrowing stablecoins to buy Bitcoin. Conversely, Bitcoin borrowers can only go short, betting on its price to drop. Unlike futures contracts, the balance between long and short margins is not always equal.
OKX’s traders’ loan-to-margin ratio increased from January 12 to 16, signaling that professional traders increased their leveraged buying as Bitcoin gained 18%.
On January 20, however, the indicator reversed its trend, as excessive leverage, which was 35 times higher for buying activity on January 16, fell to a neutral or bullish level.
Currently at 15, the metric favors stablecoin lending by a large margin and indicates that shorts are unsure about building positions with bearish leverage.
However, this data does not explain whether pro traders have become less bullish or have decided to reduce their leverage by depositing additional margin. Therefore, we need to analyze the options markets to understand if the sentiment has changed.
The 25% delta skew is a telltale sign whenever arbitrage desks and market makers overprice upside or downside protection.
The indicator compares similar call (buy) and put (sell) options and becomes positive when fear is prevalent, because the premium of protective put options is higher than risky call options.
In short, the skew metric will exceed 10% if traders fear a Bitcoin price crash. On the other hand, generalized excitement is reflected in a negative skew of 10%.
On January 15, the 25% delta skew reached its lowest level in more than 12 months. Options traders were finally paying a premium for bullish strategies instead of the other way around.
Currently at -2%, the delta skew signals that investors are pricing similar probabilities for upside and downside cases, which is a little less optimistic than expected considering the recent rally towards $22,000.
Derivatives data keeps the bullish case in check as margin buyers of stablecoins have significantly deleveraged and options markets are pricing in similar risks to both sides. On the other hand, the bears have not found a level that makes them comfortable to go short by borrowing Bitcoin in the margin markets.
Traditional markets continue to play a crucial role in setting the trend, but Bitcoin bulls have no reason to fear as long as derivatives metrics remain healthy.
This article does not contain investment advice or recommendations. Every investment and trading involves risk and readers should do their own research before making a decision.