A Surge in Bitcoin Futures: Market Sentiment or Market Reset?
In the recent weeks, the Bitcoin futures premium has been at its highest in a year and a half, observed on July 4. This rise is driving a heated debate among traders, wondering if the metrics in the derivatives markets are suggestive of an “overzealous sentiment” or just a “normalization” after an extended bear market.
Bitcoin’s Price Movements and External Influences
The BTC value, at $30,804, has been contained within a tight 4.4% band since June 22, fluctuating between $29,900 and $31,160 based on its daily closing prices. The absence of a decisive trend is disconcerting to some, but it mirrors the conflicting influences currently at work.
On one hand, the record-breaking inversion of the U.S. Treasury yield curve has put a damper on investor sentiment. This phenomenon, known as yield curve inversion, often foreshadows economic downturns. It happens when short-term Treasury notes yield higher returns than their long-term counterparts, and has reached its peak since 1981 at 1.09%.
Conversely, promising signs from the U.S. economy have led investors to anticipate additional interest rate hikes by the central bank to mitigate inflation.
Cryptocurrency regulation has also been a key focus for investors. Recent events include the U.S. District Court mandating the exchange Kraken to disclose user details for transactions over $20,000 within a year, Thailand’s SEC banning crypto lending services, and the Monetary Authority of Singapore introducing new requirements for crypto service providers to hold customer assets in a statutory trust by the year-end.
Therefore, investors are left wondering: Can Bitcoin surmount the $31,000 resistance? Given the potential for economic recession and tightening global regulations, this is no simple question to answer.
However, clues about the market’s upcoming trajectory might be deduced from Bitcoin futures contract premiums, as well as the costs of hedging with BTC options.
Record-High Bitcoin Futures Premium
Bitcoin’s quarterly futures, popular among big players and arbitrage desks, usually carry a small premium over spot markets, indicating sellers demanding more to postpone settlement. Hence, in a healthy market, BTC futures contracts should show a 5 to 10% annualized premium— a scenario called contango, common across markets, not just crypto.
The past week has witnessed a significant uptick in demand for leveraged BTC longs, pushing the futures contract premium from 3.2% to 6.4% on July 3. Apart from hitting an 18-month high, this shift represents a transition to a more neutral-to-bullish stance.
Supplementing this perspective, it’s worth examining the options markets, particularly the 25% delta skew, which helps gauge investor sentiment towards potential market movements.
A skew metric above 7% implies expectations of a price drop, while periods of enthusiasm usually present a negative 7% skew. Notably, the 25% delta skew showed a notable shift in bullish momentum from June 21, descending below negative 7% as Bitcoin’s price moved above $30,000. This culminated in a sentiment of “greed” with a negative 13% skew on July 2.
Balanced Optimism Bodes Well for Bitcoin
A 6.4% futures basis and a negative 13% delta skew are generally considered moderately bullish. However, in light of analysts predicting a 50% probability of the SEC approving BlackRock’s spot Bitcoin ETF, these figures could be seen as conservative. Yet, a level of skepticism is indeed beneficial for buyers utilizing derivatives contracts to avoid the peril of mass liquidations.
Presently, macroeconomic variables and regulatory uncertainties probably account for the tempered optimism for BTC derivatives, despite numerous ETF requests from the world’s biggest asset managers.
Despite reaching 18-month highs, the current Bitcoin futures premium is still quite modest compared to previous periods of extreme bullishness, like the 19% premium observed in October 2021.
Therefore, today’s 6.3% futures premium signals a balanced market, rather than a 10% or higher indicating excessive bullishness or market euphoria. Traders should take comfort in this, as there’s still room for bulls to leverage their long positions without undue risk.