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Bitcoin price flirts with $40K, but derivatives data is still bullish


14 Sep 2021

#Bitcoin

Bitcoin is leaning toward the $40,000 level, but derivatives data shows traders are holding a neutral-to-bullish stance. The price of Bitcoin (BTC) is facing an intense period of volatility since moving from a $52,950 top on Sept. 7 to a $42,800 low just two hours later. More recently, the $45,000 support was held for a couple of days despite being heavily tested, and this triggered a $3,400 up- and down-swing on Sept. 13. There’s little doubt that shorts — traders betting on a price decrease — have taken the upper hand since the liquidation of $3.54 billion worth of long (buyers) futures contracts on Sept. 7.

MicroStrategy’s Sept. 13 announcement that it added over 5,050 Bitcoin at an average price of $48,099 was not enough to reestablish confidence, and the cryptocurrency’s price remained unchanged near $44,200.

While the impact of shorts may be being felt, it’s more likely that regulatory concerns continue to suppress markets, as the United States Treasury Department has reportedly discussed potential regulation for private stablecoins, as reported by Reuters on Sept. 10. The growing interest from regulators comes as the stablecoin market capitalization has grown from $37 billion in January to its current $125 billion. Furthermore, both Visa and Mastercard have reiterated their interest in stablecoin-related solutions. Regardless of the reason behind the current price weakness, derivatives contracts have been displaying bullish sentiment since Aug. 7.

Professional traders have been bullish for the past five weeks

Bitcoin quarterly futures are the preferred instruments of whales and arbitrage desks because they have the significant advantage of lacking a fluctuating funding rate. However, these might seem complicated for retail traders due to their settlement date and the price difference from spot markets. When traders opt for perpetual contracts (inverse swaps), derivatives exchanges charge a fee every eight hours depending on which side demands more leverage. Meanwhile, fixed-date expiry contracts typically trade at a premium from regular spot market exchanges to compensate for the delayed settlement.

A 5% to 15% annualized premium is expected in healthy markets because the money locked in these contracts could otherwise be used on lending opportunities. This situation is known as contango and happens on almost every derivatives instrument. However, this indicator fades or turns negative during bearish markets, causing a red flag known as “backwardation.”

The above chart shows the premium (basis rate) rising above 8% on Aug. 7 and sustaining this moderate bullishness ever since. Thus, data is exceptionally healthy and depicts hardly any lack of conviction, even with Bitcoin testing the sub-$44,000 level twice in the past 15 days.

Futures open interest remains healthy

The $3.54 billion in liquidations across derivatives markets on Sept. 7 definitely hurt overleveraged traders, but the open interest on Bitcoin futures is still healthy in the grand scheme of things. Check out how the current $14.8 billion figure is 23% above June’s and July’s $12 billion average. This contradicts speculations that traders have been severely impacted and are hesitant to create positions due to Bitcoin’s volatility or somehow fearing an impending bearish event.

There should be no doubt, at least according to futures markets, that investors are neutral to bullish despite the recent price correction. Of course, traders should monitor important resistance levels, but so far, $44,000 has held firm.


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