Uncertainty prevails as December 2021 Bitcoin futures show an inverted pattern

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It is not yet clear whether recent news from Binance regarding its temporary suspension from the UK financial system is the main driver of the Bitcoin (BTC) price drop today. As Cointelegraph reported, the exchange sent emails to affected customers but gave no details.

Whatever the reason for the low prices, derivative contracts have started showing some quirks, which could be a troubling sign.

Quarterly Bitcoin futures are the preferred instruments of whales and arbitrage bureaus. While this may seem complicated to retail traders due to their settlement date and price difference compared to spot markets, their most important advantage is the absence of fluctuating funding rates.

When traders go for perpetual contracts (reverse swaps), a fee is typically charged every 8 hours and varies depending on which side requires the most leverage. On the other hand, fixed date expiration contracts usually trade at a premium over regular spot market trades.

This effect occurs as the sellers postpone settlement and therefore seek compensation for this period.

Annualized Bitcoin Futures Premiums. Source: BitcoinFuturesInfo.com

As illustrated above, the September 24 contract is trading at an annualized premium of 2.2% at Deribit, while the December 31 contract is at 3.8%. This curve is precisely what to expect in healthy markets, as a longer settlement period would generally cause sellers to ask for a more substantial premium.

Keep in mind that there is a decent “Cash and Carry” activity being carried out by the Arbitration Bureaus, buying Bitcoin while selling short the futures contract. These players do not actually bet on a negative price movement because their net exposure is flat, but this activity limits the premium on the futures contracts.

Related: Bitcoin Price Is Going Down, But Here Are 3 Reasons $ 1 Billion Selloffs Are Less Common

Zoom on the situation as a whole, is the 3-month premium less than 4%?

Therefore, a few exchanges with a flat or slightly inverted futures curve should not be interpreted as a bearish indicator. More importantly, investors should measure the 3-month term premium, which is expected to stay above 4% annualized.

Anytime this metric drops below it indicates a lack of interest in leveraged longs and is interpreted as bearish.

Currently, the September average on an annualized basis (prime) of the four exchanges examined stands at 3.3%, which is definitely worrying.

However, this is not unusual after the market has seen a 50% correction. This situation should simply be interpreted as a lack of buyer confidence instead of an alarming bearish sign.

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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