The price of Bitcoin is correcting, but what does the futures data show?

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Bitcoin had underperformed most altcoins over the past two months, but that trend reversed when its 20% rally pushed its market cap to cross the $ 1,000 billion mark on October 6. . This has brought investors’ attention back to the major cryptocurrency, and altcoins are currently in the red for the day.

The current positive momentum could be dangerous if Bitcoin (BTC) traders become overconfident and abuse their leverage to open long positions. To avoid this, traders should carefully analyze derivative markets to rule out this risk.

Top 14 weekly coin performance. Source: CoinMarketCap

Notice above how the market cap of altcoin rose 5.8%, while Bitcoin posted a gain of 20.8% over the same time frame. Sure enough, there were outliers such as Shiba Inu (SHIB), which rose 200%, Fantom (FTM), which rose 60%, and Klaytn (KLAY), which gained 36%. However, the overall market capitalization of altcoins has not accompanied the performance of Bitcoins.

Some well-known figures have spoken out, such as billionaire Wall Street investor Bill Miller, who recently expressed his optimism for Bitcoin while raising concerns about most altcoin projects. Miller explicitly mentioned the big banks involved and referred to huge amounts of venture capital money going into Bitcoin.

The recent Bitcoin frenzy appears to be driven by the macroeconomic scenario. The United States has increased its debt limit by $ 480 billion to repay its obligations until early December. Inflationary pressures induced by endless stimulus packages and low interest rates fueled the long rally in commodities.

For example, oil hit its highest level in seven years and wheat futures recently hit an all-time high since February 2013. Even the S&P Case-Shiller Home Price Index showed a gain. annualized 23.3%.

To understand if Bitcoin traders have become overly excited, traders need to analyze Bitcoin derivatives indicators such as futures premium and option asymmetry.

Futures premium shows traders are slightly bullish

The base rate measures the difference between long-term futures contracts and current spot market levels. This indicator is also often referred to as a term premium.

Bitcoin 3-month futures on an annualized basis. Source: Laevitas

An annualized premium of 5% to 15% is expected in healthy markets, which is a situation known as contango. This price difference is due to the fact that sellers are asking for more money to withhold payment for longer.

Bitcoin’s recent 20% price rally has caused the indicator to hit the upper limit of this neutral zone, meaning investors are bullish but not yet overconfident. Anytime buyers ask for excessive leverage, the base rate can easily exceed 25%, as seen in mid-May.

To exclude the externalities specific to the futures instrument, it is also necessary to analyze the options markets.

Bitcoin options signal neutral sentiment

The 25% delta skew compares similar call (buy) and sell (put) options. This metric will turn positive whenever fear prevails, as traders expect a potential drop.

The reverse is true when options traders are bullish, causing the 25% delta asymmetry indicator to go into the negative zone. Readings between -8% and + 8% are generally considered neutral.

Deribit BTC options 25% delta skew. Source: Laevitas

The chart above shows that there hasn’t been a single case of options traders getting overconfident in the past six months, which would signal greed as the 25% delta asymmetry fell below. by -8%. Meanwhile, the indicator has been near 0 over the past week, showing balanced risks between bears and bulls.

These findings inevitably reflect a lack of confidence on the part of buyers, but quite the opposite. If the Bitcoin bulls had already been overconfident at $ 57,000, there would be little room for additional leverage, which would increase the risk of a cascading sell-off if a momentary price correction occurred.

The bulls are modestly confident, and even a 20% price correction is unlikely to change the situation as the base futures market rate posts a reasonable premium after the recent rally.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trade move involves risk. You should do your own research before making a decision.

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