Professional traders adopt a laissez-faire approach as Bitcoin price explores new lows

Professional traders adopt a laissez-faire approach as Bitcoin price explores new lows

Bitcoin (BTC)’s current drop of 20% over the past four days has put the price at a nine-month low, and while these moves may seem unusual, a large number of large listed companies and commodities have faced a similar correction. For example, natural gas futures corrected 15.5% in four days, and nickel futures fell 8% on May 9.

Other victims of the correction include several $10 billion companies and companies with a higher market capitalization listed on US stock exchanges. Bill.com (BILL) is trading down 30%, while Cloudflare (NET) provided a price correction of 25.4%. Dish Network (DISH) also faced a drop of 25.1% and the price of Ubiquiti (UI) fell by 20.4%.

Continuing weak economic data suggests that a recession is on its way. Meanwhile, the US Federal Reserve has reinstated its expansionary stimulus and is now aiming to cut its balance sheet by $1 trillion. On May 5, Germany also announced that factory orders fell 4.7% compared to the previous month. Labor costs in the US made an 11.6% increase on the same day.

This bearish macroeconomic scenario can partly explain why Bitcoin assets and risk continue to be corrected, but a closer look at how professional traders are positioning can also provide useful insight.

Bitcoin futures premiums settled at 2.5%.

To understand whether the recent price action reflects the sentiment of top traders, one must analyze the premium for Bitcoin futures, otherwise known as the “base price.”

Unlike a perpetual contract, these fixed-calendar futures contracts do not have a financing rate, so their price will differ significantly from regular spot exchanges. Three-month futures are trading at 5% or lower annual premiums when these professional traders flip lower.

On the other hand, a neutral market should offer a base rate of 5% to 12%, which reflects the unwillingness of market participants to lock in cheap bitcoins until the deal settles.

Bitcoin futures premium for 3 months. Source: laevitas.ch

The above data shows that the Bitcoin futures premium has been below 5% since April 6, indicating that futures market participants are reluctant to open long-term leveraged positions.

Even with the above data, the recent 20% price correction wasn’t enough to push this metric below the 2% threshold, which should be interpreted as positive. Sure, the bulls have no reason to celebrate, but there are no signs of panic selling from a futures market point of view.

Option Traders Get Deep Into the “Fear” Zone

To rule out the externalities of futures, traders should also analyze the options markets. The simplest and most effective measure is the delta skew of 25%, which compares equivalent buy (buy) and short (sell) options.

In short, the indicator will turn positive when “fear” prevails because the premium for protective selling options is higher than for buying (bullish) options. On the other hand, a negative deviation of 25% indicates bullish markets. Finally, readings between negative 8% and positive 8% are usually considered neutral.

Deribit Bitcoin 30-day options at 25% delta skew. Source: laevitas.ch

The above chart shows Bitcoin option traders indicating “fear” since April 8 after BTC broke below $42,500. In contrast to the futures markets, the initial sentiment gauge for options has shown a worsening situation over the past four days with a delta deviation of 25% currently at 14.5%.

To put things into perspective, the last time the options market “fear and greed” index touched 15% was on January 28, after Bitcoin plunged 23.5% in four days.

Margin markets bullish sentiment has peaked

Traders should also analyze the margin markets. Borrowing cryptocurrency allows investors to leverage their trading position and possibly increase their returns. For example, a trader can borrow Tether (USDT) and use the proceeds to increase his exposure to Bitcoin.

On the other hand, borrowing Bitcoin allows an individual to bet that its price will fall. However, the balance between long positions and short positions is not always matched.

OKEx USDT/BTC Margin Lending Ratio. Source: OKEx

The data shows that traders have been borrowing more bitcoin recently, with the ratio dropping from 24.5 on May 6 to 16.8 currently. The higher the index, the more confident professional traders will be in the bitcoin price.

Despite some recent Bitcoin borrowing activity aimed at betting on a price dip, margin traders remain mostly bullish, according to the USDT/BTC lending ratio. Normally, numbers above five reflect the upside and the recent high of 24.5 was the highest in more than six months.

According to derivatives metrics, bitcoin traders fear a deep correction as macroeconomic indicators deteriorate. However, investors are also anticipating a potential crisis in the traditional markets, so Bitcoin’s 20% correction only follows the broader risk assets.

On the plus side, there are no signs of short (negative) leverage using margin or futures, which means there is little buy-in from sellers at current price levels.

The opinions and opinions expressed here are solely those of author and do not necessarily reflect the opinions of Cointelegraph. Every investment and trading movement involves risks. You should do your research when making a decision.