HODL your horses, Bitcoin options data says $18.5K is not a local top

HODL your horses, Bitcoin choices information says $18.5K shouldn’t be an area high


Earlier right this moment, Bitcoin (BTC) worth peaked at $18,476 after a powerful 35% bull run that seems to have began in early September. 

This highly effective motion was adopted by a correction to $17,000, a pure pullback. This adjustment led some traders to query whether or not the present formation resembles the $13,850 high shaped in July 2019.

BTC/USD, July 2019. Supply: TradingView

Again then, a 30% drop adopted a similar-sized rally, and afterwards it took Bitcoin 14 months to regain the $13,850 stage. Coincidently, an intense flash crash occurred proper after that native excessive, however the worth ultimately recovered and stabilized close to $12,800.

If one thing related occurred this time round, traders would count on a $13,000 low for the present cycle. Aside from a flash crash following a powerful rally, what different indicators mimic the July 2019 worth motion?

Step one is to research the futures foundation indicator, which will be interpreted as investor optimism. Foundation can be incessantly known as the futures premium, and it measures the premium of longer-term futures contracts to the present spot (conventional markets) ranges.

Mounted-month futures contracts often commerce at a slight premium, indicating that sellers request more cash to withhold settlement longer. On wholesome markets, futures ought to commerce at a 5% or extra annualized premium, in any other case often known as contango.

Bitcoin 3-month futures annualized foundation, July 2019. Supply: Skew

Some extreme optimism might need taken place as the premise indicator touched 20% on June 23. Nonetheless, it sustained very wholesome ranges by means of the complete worth correction again in 2019.

The above chart will be interpreted as an absolute unwillingness to scale back lengthy positions. This motion occurred regardless of a $2,000 flash crash adopted by a 30% correction from the highest.

Oddly sufficient, not even the 30% crash that adopted the $13,850 high lowered the futures contract premium. Diminished bullishness often has an enormous affect on the premise indicator.

Quick-forward to the present state of affairs, and there is not a single occasion of extreme optimism in response to the identical metric.

Bitcoin 3-month futures annualized foundation, November 2020. Supply: Skew

The above chart exhibits the premise indicator shortly falling beneath 10% proper after the $18,500 high formation. To additional differentiate the present worth motion from July 2019, two weeks forward of the worth peak the futures premium stood at 0%, a transparent indication that traders have been feeling bearish.

This time round, the bottom stage over the previous couple of weeks has been 7%. This implies traders have stored constructive expectations over the previous couple of months, whereas in July 2019, the market confronted an intense, fast, optimistic rush.

Choices merchants weren’t so bullish forward of the pump

To raised assess the present market sentiment, traders also needs to consider choices market spreads. The 25% delta skew indicator will shift to unfavorable when name (impartial/bullish) choices are extra pricey than equal put choices. The metric often oscillates between -20% to +20%, and it displays the present market sentiment.

Bitcoin 3-month choices 25% delta skew, June 2019. Supply: Skew

Oddly sufficient, Bitcoin underwent an 80% bull run within the three weeks previous the $13,850 high, however the choices market appeared ill-prepared for this. On the time, safety for the upside utilizing name choices have been buying and selling on the similar premium because the bearish places.

Subsequently, we are able to conclude that possibility merchants have been pricing in the identical likelihood of a powerful market swing in both course. This case has not been the case just lately, because the 25% delta skew indicator exhibits.

Bitcoin 3-month choices 25% delta skew, November 2020. Supply: Skew

For the previous 30 days, this selection market sentiment gauge has been signaling bullishness. Merchants are unwilling to promote safety for the upside, thereby inflicting the skew indicator to achieve an unprecedented -30%.

As skilled merchants are demanding a large premium for bullish name choices, one can solely conclude {that a} sudden worth dump is much away from their expectations.

Traders shouldn’t make selections solely primarily based on the interpretation of a single indicator that exhibits possibility merchants are overly bullish proper now. These merchants might have been taken without warning and due to this fact should not desirous to open brief positions.

There are substantial variations between July 2019 high and the present market in response to futures and choices markets. This means that there aren’t any indicators {that a} 30% drop will happen over the following few days.

The views and opinions expressed listed below are solely these of the author and don’t essentially mirror the views of Cointelegraph. Each funding and buying and selling transfer entails threat. It’s best to conduct your personal analysis when making a choice.