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May 3, 2022

This Might Be Why Bitcoin is is Still Hovering Around $38k

Bitcoin (BTC) has failed to break out of a 26-day-long downward channel. Investors are wary of owning risky assets after the Federal Reserve of the United States committed to decrease its $9 trillion balance sheet.

While global inflation has been rising, the United Kingdom’s retail sales declined 1.4 percent in March, signaling the start of an economic slump. Furthermore, Japan’s industrial production fell 1.7 percent in March. Finally, the United States’ GDP decreased 1.4 percent in the first quarter of 2022.

This pessimistic macroeconomic scenario helps explain why Bitcoin has been in a downward trend since early April. However, it is necessary to examine how expert traders position themselves, and derivatives markets give some useful signs.

To determine if the present bearish trend reflects the mood of top traders, examine Bitcoin’s futures contracts premium, commonly known as a “basis.”

These fixed-calendar futures, unlike perpetual contracts, do not have a funding rate, hence their price will vary greatly from conventional spot markets. A pessimistic market mood leads the three-month futures contract to trade at an annualized premium of 5% or less (basis).

A neutral market, on the other hand, should provide a 5% to 12% basis, demonstrating market players’ hesitancy to lock in Bitcoin for a low price until the deal settles.

According to the preceding data, Bitcoin’s futures premium has been less than 5% since April 6, indicating that futures market players are hesitant to establish leverage long (purchase) positions.

Traders should examine the options markets in order to avoid externalities peculiar to the futures instrument. The delta skew of 25% compares similar call (buy) and put (sell) options. When “fear” is prominent, the indicator will turn positive because the premium for protective put options is greater than the premium for call options.

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Despite some extra Bitcoin borrowing activity aimed at speculating on a price drop, margin traders, according to the USDT/BTC lending ratio, remain generally bullish.

Bitcoin dealers are concerned about future price declines as macroeconomic indicators deteriorate, as investors anticipate a potential crisis impact on riskier markets. However, there are no evidence of leveraged short (negative) bets utilizing margin or futures, suggesting that sellers are hesitant to sell at $38,000.