BTC options data suggest that the Bitcoin price movement has legs, despite mounting macroeconomic concerns and the possibility of a small break in the crypto market rally.
This week, Bitcoin reached a 2023 high of $23,100, following a significant recovery in traditional markets, particularly the tech-heavy Nasdaq Composite Index, which gained 2.9% on Jan. 20.
Economic data continues to fuel investors’ optimism that the Federal Reserve of the United States will slow the pace and duration of interest rate hikes. For example, sales of previously owned homes declined 1.5% in December, the 11th consecutive month of fall, as high mortgage rates in the United States weighed heavily on demand.
On January 20, Google announced the layoff of 12,000 employees, accounting for more than 6% of its global workforce. The poor news is still causing people to buy risk assets, but JPMorgan’s chief U.S. equities strategist, Dubravko Lakos-Bujas, believes that worse earnings expectations will “place downward pressure” on the stock market.
On January 20, the risk of a recession grew as Federal Reserve Governor Christopher Waller stated that a moderate recession should be allowed if it means lowering inflation.
Some experts attribute Bitcoin’s gains to Digital Currency Group applying for Chapter 11 bankruptcy protection, which would allow troubled Genesis Capital to seek a reorganisation of its debts and business operations. More crucially, the decision reduces the danger of a fire sale of Grayscale Investments assets, notably the $13.3 billion Grayscale GBTC trust fund.
Let’s look at derivatives measures to better understand how professional traders are positioned in today’s market.
Because it allows investors to borrow cryptocurrencies to leverage their positions, margin markets provide insight into how experienced traders are positioned.
One can, for example, increase exposure by borrowing stablecoins to purchase Bitcoin. Borrowers of Bitcoin, on the other hand, may only wager on the cryptocurrency’s price falling. In contrast to futures contracts, the balance of margin longs and shorts is not always equal.
The above data illustrates that the margin lending ratio of OKX traders increased from January 12 to January 16, indicating that professional traders increased their leverage longs as Bitcoin rose 18%.
However, the indicator reversed its trend on Jan. 20 when the excessive leverage, which was 35 times higher for buying activity on Jan. 16, retreated to a neutral-to-bullish level.
At 15, the statistic strongly favours stablecoin borrowing and shows that shorts are hesitant to initiate bearish leveraged positions.
However, such data does not explain whether professional traders were less bullish or decided to lessen their leverage by depositing more margin. As a result, one should examine options markets to see if sentiment has shifted.
When arbitrage desks and market makers overcharge for upside or downside protection, the 25% delta skew is a red flag.
The indicator compares similar call (buy) and put (sell) options and turns positive when fear is common because the price for protective put options is larger than the premium for risk call options.
In brief, if traders anticipate a Bitcoin price drop, the skew metric will rise above 10%. Generalized excitement, on the other hand, has a negative 10% skew.
The 25% delta skew, as shown above, reached its lowest level in more than a year on January 15. Option traders were now paying a premium for bullish tactics rather than bearish methods.
The delta skew is currently minus 2%, indicating that investors are pricing similar probability for bull and bear situations, which is slightly less optimistic than predicted given the recent surge toward $22,000.
Derivatives data casts doubt on the bullish view, as buyers utilising stablecoin margin cut their leverage dramatically, and option markets price equal risks for either side. Bears, on the other hand, have yet to find a level at which they are comfortable establishing short bets by borrowing Bitcoin on margin markets.
Traditional markets continue to play an important role in trend setting, but Bitcoin bulls have nothing to worry about as long as derivatives indicators remain solid.
