Bitcoin Derivatives Separate Speculation from Momentum – Bitcoin Magazine
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This article covers some of the recent action in the bitcoin derivatives market, as well as touching on the evolving relationship between bitcoin and the legacy financial system.
Action in global capital markets has been intense, with massive volatility across currencies, more selling in bonds and a brief bullish divergence for bitcoin, exciting the bulls.
As bitcoin pushed back above $20,000, there was some chatter of a potential disconnect, as bitcoin was up over 7% while US stock markets fell around 4% in the past week. While we’d certainly love to see a moment where bitcoin finds relief amid an increasingly tumultuous environment in the legacy financial system, we remain skeptical of this outcome in the near future, as the data just doesn’t support it.
Some took this chart to mean that bitcoin was decoupled from stocks
We cannot stress enough that today’s bitcoin trading environment is less about bitcoin itself and more about the dollar. As yields across maturities and currencies soar higher, the value of global assets collapses in tandem, which will later lead to a day of reckoning where everything sells in tandem.
As we like to say, the alt bubble is deflating as the asset at the bottom of it all, the US Treasury, continues to bleed.
Let’s go back to bitcoin for a moment. What was the period of outperformance from and can we expect more of it soon?
The simple answer is that the kind of buying that took place – long positions in the bitcoin futures market – is never sustainable.
An increase in open interest led to the increase in the bitcoin price
Tens of thousands of bitcoin worth of net buys became net sellers in hours, as the surge in open interest that led to the rise in market price quickly went underwater.
Tens of thousands of bitcoin worth of net buys became net sellers in hours
Our beliefs regarding the bitcoin derivatives market and its insight into the state of the market cycle are as follows:
When the variable interest rate is significantly negative, the bulk of spot sales and mortgage liquidation has occurred. The variable interest rate across the perpetual futures complex can give us insight into whether the bulls or bears are over-aggressive.
When the funding rate is significantly negative, it may be due to both closing long positions driving the price below the spot market or due to aggressive short positions pushing the price down. Funding rates in today’s market environment are much more subdued than the madness seen in 2021.
Funding rates in today’s market environment are much more subdued than the madness seen in 2021
Our expectation is that a volatility in older markets will lead to a large liquidation of bitcoin derivatives, driving the price below the spot markets, while short traders piled up. This will be seen by a drastically negative perpetual funding rate for futures (variable rate that encourages traders to settle prices close to the spot market rate).
We haven’t seen that, in terms of the level at which the 2020 and 2021 markets bottomed.
The market is not there today, in our opinion.
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