The BTC futures premium flashed a slightly positive reading, but options markets show extreme fear from whales and market markers.
Bitcoin (BTC) bounced 19% from the $25,400 low on May 12, but has investor confidence in the market been restored? Judging by the ascending channel formation, it’s possible that bulls at least have plans to recover the $30,000 level in the short term.
Does derivatives data support reclaiming $30,000, or is Bitcoin potentially heading to another leg down after failing to break above $31,000 on May 16?
Bitcoin price falters in the face of regulatory concerns and the Terra debacle
One factor placing pressure on BTC price could be the Luna Foundation Guard (LFG) selling 80,081 Bitcoin, or 99.6%, of their position.
On May 16, LFG released details on the remaining crypto collateral and from one side, this project’s sell-off risk has been eliminated, but investors question the stability of other stablecoins and their decentralized finance (DeFi) applications.
Recent remarks from FTX CEO Sam Bankman-Fried about proof-of-work (PoW) mining environmental and scalability issues further fueled the current negative sentiment. According to Bankman-Fried, the use of proof-of-stake (PoS) consensus is better suited to accommodate millions of transactions.
On May 14, a local United Kingdom newspaper reported the Department of Treasury’s intention to regulate stablecoins across Britain. According to the Treasury spokesman, the plan does not involve legalizing algorithmic stablecoins and instead prefers 1:1 fully-backed stablecoins.
While this news might have impacted market sentiment and BTC price, let’s take a look at how larger-sized traders are positioned in the futures and options markets.
The Bitcoin futures premium is showing resilience
The basis indicator measures the difference between longer-term futures contracts and the current spot market levels. The annualized premium of Bitcoin futures should run between 5% and 10% to compensate traders for “locking in” the money for two to three months until the contract expires. Levels below 5% are bearish, while numbers above 10% indicate excessive demand from longs (buyers).
The above chart shows that Bitcoin’s basis indicator moved below the 5% neutral threshold on April 6, but there has been no panic after the sell-off to $25,400 on May 12. This means that the metric is mildly positive.
Even though the basis indicator points to bearish sentiment, one must remember that Bitcoin is down 36% year-to-date and 56% below its $69,000 all-time high.
Options traders are beyond stressed
The 25% options delta skew is extremely useful because it shows when Bitcoin arbitrage desks and market makers are overcharging for upside or downside protection.
If option investors fear a Bitcoin price crash, the skew indicator will move above 10%. On the other hand, generalized excitement reflects a negative 10% skew.
The skew indicator moved above 10% on April 6, entering the “fear” level because options traders overcharged for downside protection. However, the current 19% level remains extremely bearish and the recent 25.5% was the worst reading ever registered for the metric.
Although Bitcoin’s futures premium was resilient, the indicator shows a lack of interest from leverage buyers (longs). In short, BTC options markets are still stressed and suggest that professional traders are not confident that the current ascending channel pattern will hold.
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