Bitcoin futures premium hits 18-month high Time to move higher?

[ad_1]

The Bitcoin (BTC) futures premium hit an 18-month high on July 4. But traders are now wondering if derivatives metrics indicate “excessive excitement” or “mean reversion” after a prolonged bear market.

BTC Price Gains Capped by Regulators, Macroeconomics

Bitcoin’s price has been trading in a tight 4.4% range since June 22, hovering between $29,900 and $31,160 as measured by its daily closing prices. The lack of a clear trend may be uncomfortable for some, but it reflects the opposing pilots currently in play.

For example, investor sentiment was negatively affected by the historic reversal of the US Treasury yield curve, which reached its highest level on record.

US spread 10 years / 2 years. Source: Real Investment Advice

The closely watched inverted spread between 2-year and 10-year Treasuries hit its highest level since 1981 at 1.09%. The phenomenon known as yield curve inversion, when short-term Treasury bills trade at higher yields than long-term ones, typically precedes economic recessions.

Related: Fed Halts Interest Rates, But Bitcoin Options Data Still Indicates Lower BTC Prices

On the other hand, signs of strength in the US economy would have prompted investors to weigh the possibility of another interest rate hike by the central bank to keep inflation under control.

In addition to these macroeconomic distortions, cryptocurrency regulation has also been the focus of investor attention lately. Here are some recent examples:

Kraken’s exchange was required by the US District Court for the Northern District of California to provide details of users who transacted over $20,000 in a calendar year; the Thailands Securities and Exchange Commission banned crypto lending services, thereby prohibiting crypto platforms from offering any form of return on crypto deposited by customers; the Monetary Authority of Singapore has announced new requirements for crypto service providers to hold client assets in a legal trust by the end of the year.

Investors are therefore probably wondering now: Does Bitcoin have the strength to break through the $31,000 resistance? Of course, one must first consider a potential economic downturn and growing regulatory crackdowns around the world.

Fortunately, Bitcoin futures premiums can provide clues to traders about the next market move for the reasons outlined below as well as the costs of hedging using BTC options.

Bitcoin futures premium hits 18-month high

Quarterly bitcoin futures contracts are popular among whales and arbitrage desks. However, these fixed-month contracts typically trade at a slight premium to spot markets, indicating that sellers are asking for more money to delay settlement.

As a result, BTC futures in healthy markets are expected to trade at a 5% to 10% annualized premium, a situation known as contango, which is not unique to crypto markets.

Annualized 3-month Bitcoin futures premium. Source: Laevitas

Demand for leveraged BTC longs has increased significantly over the past week, with the futures premium jumping to 6.4% on July 3 from 3.2% the previous week. Along with hitting the highest level in 18 months, the metric has finally moved towards a neutral to bullish zone.

Related: Here’s What Happened In Crypto Today

To better gauge market sentiment, it is also useful to look at options markets, as the 25% delta skew can gauge whether stagnant prices have made investors less optimistic. It reveals when arbitrage desks and market makers charge higher prices to protect against upside or downside moves.

In short, if traders expect a decline in the price of Bitcoin, the bias measure will exceed 7%, while periods of excitement typically have a negative bias of 7%.

Bitcoin options 30 days 25% delta skew. Source: Laevitas

The 25% delta skew metric has seen a full reversal, indicating that bullish momentum resumed on June 21 when it fell below -7%. As the price of Bitcoin rallied above $30,000, the indicator continued to improve, peaking in “greed” with a negative bias of 13% on July 2.

A “healthy” moderate optimism for the Bitcoin market

Generally, a futures basis of 6.4% and a negative delta bias of 13% would be considered moderately bullish. However, given analysts’ estimate of a 50% chance for Bitcoin spot approval from BlackRock, these metrics can be considered conservative. But some skepticism is well and truly healthy for buyers using derivative contracts and avoids the risk of cascading liquidations.

Related: The Bitcoin ETF Race Begins: Has Institutional Trust Returned to Crypto?

Currently, macroeconomic factors and regulatory uncertainty likely explain the suppressed optimism for BTC derivatives despite multiple ETF demands from the world’s largest asset managers.

So, 18-month highs aside, the current Bitcoin futures premium remains relatively modest, compared to previous examples of excessive optimism such as 19% in October 2021.

So today’s 6.3% futures premium represents a healthy market as opposed to 10% or more indicating excessive optimism or euphoria. Additionally, traders should remain confident as bulls have the opportunity to take more advantage of long positions without taking on excessive risk.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

[ad_2]