$15.5K retest is more likely, according to Bitcoin futures and options
Bitcoin (BTC) has been trading near $16,500 since November 23, recovering from a drop to $15,500 as investors feared the imminent insolvency of Genesis Global, a cryptocurrency lending and trending company. Genesis stated on November 16 that it would “temporarily suspend redemptions and new loans in the lending business.”
After causing initial chaos in the markets, the firm refuted speculation of “imminent” bankruptcy on 22 November, although it confirmed difficulties in raising money. More importantly, Genesis’ parent company Digital Currency Group (DCG) owns Grayscale – the asset manager behind the Grayscale Bitcoin Trust, which holds around 633,360 BTC.
Contagion risks from the FTX-Alameda Research implosion continue to exert negative pressure on markets, but the industry is working to improve transparency and insolvency risk. For example, on November 24, crypto derivatives exchange Bybit launched a $100 million fund to help market makers and high-frequency trading institutions struggling with financial or operational difficulties.
More recently, on November 25, Binance published a Merkle Tree-backed proof of funds for its Bitcoin deposits. Furthermore, the exchange outlined how users can use the mechanism to verify their holdings. There is no doubt that centralized institutions must embrace transparency and assurance mechanisms to regain investor confidence.
First, however, one must analyze Bitcoin derivatives markets to fully understand how professional traders digest such news.
The futures market discount improved somewhat, but is still far from bullish
Futures contracts with fixed months usually trade at a small premium to regular spot markets because sellers require more money to hold back settlement for longer. Technically known as contango, this situation is not exclusive to crypto assets.
In healthy markets, futures should trade at an annual premium of 4% to 8%, which is enough to compensate for the risk plus the cost of capital. The opposite, when demand for bearish bets is exceptionally high, causes a discount in the futures markets – known as backwardation.
Considering the data above, it becomes clear that derivatives traders turned bearish on November 9, when the Bitcoin futures premium turned negative. Still, according to futures markets, the drop to $15,500 on November 21 was not enough to create further demand for leveraged short positions.
Options markets confirm bearishness
Traders should analyze options markets to understand whether Bitcoin is likely to retest the $15,500 support. 25% delta bias is a clear sign when arbitrage desks and market makers are overcharging for upside or downside protection.
The indicator compares similar call (buy) and put (sell) options and will turn positive when fear is prevalent because the protective put option premium is higher than risky call options.
In a nutshell, the skew will move above 10% if traders fear a Bitcoin price crash. On the other hand, generalized voltage reflects a negative bias of 10%.
As shown above, the 25% delta bias has been above the 10% threshold since November 9, indicating that options traders are pricing in a higher risk of unexpected price dumps. Currently at 18%, it signals that investors are fearful and reflects a lack of interest in offering downside protection.
Related: How bad is the current state of crypto? On-chain analyst explains
A surprise pump is likely to cause more of an impact
Considering that both Bitcoin futures and options markets are currently pricing higher odds of a downside, there is no reason to believe that an eventual retest of the $15,500 bottom will lead to massive liquidations.
Furthermore, the slight reduction in the futures discount shows that bears lack the confidence to open leverage shorts at today’s price level. Although Bitcoin derivatives data remains bearish, the surprise of a possible bull run to $18,000 is likely to cause more chaos. But for now, bears remain in control according to BTC futures and options data.
The views, thoughts and opinions expressed herein are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
