For The First Time In A Year, Bitcoin Futures Have Reached Backwardation

June

21

By Awi Khan // in Bitcoin

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After futures contracts trade below the spot market rate, risk-averse BTC derivatives traders throw in the towel.

The month-to-date Bitcoin (BTC) chart seems to be quite gloomy, and the price of under $18,000 observed over the weekend was the lowest since December 2020. Bulls’ present hope is centered on transforming $20,000 into support, but derivatives measures tell a different message, as professional traders remain concerned.

It’s vital to note that the S&P 500 index declined 11% in June, while multibillion-dollar firms like Netflix, PayPal, and Caesars Entertainment have all corrected with losses of 71%, 61%, and 57%, respectively.

On June 15, the Federal Open Market Committee increased its benchmark interest rate by 75 basis points. Federal Reserve Chairman Jerome Powell indicated that more severe tightening could be on the way as the monetary authority fights to keep inflation under control. On the other hand, investors and analysts worry that this action may exacerbate the likelihood of a recession. According to a client statement from Bank of America dated June 17:

“Our worst fears around the Fed have been confirmed: they fell way behind the curve and are now playing a dangerous game of catch up.”

Furthermore, according to JPMorgan Chase analysts, the record-high overall stablecoin market share in crypto “points to oversold situations and considerable upside for crypto markets from here.” The lower percentage of stablecoins in the total crypto market valuation, according to experts, is linked with a constrained crypto potential.

Crypto investors are presently divided between fears of a recession and optimism that the $20,000 support level will keep, as stablecoins may eventually pour into Bitcoin and other cryptocurrencies. As a result, checking at derivatives data might help you determine if investors are pricing in a better likelihood of a slump.

The Bitcoin Futures Premium Turns Negative For The First Time In A Year

Since of the price gap between quarterly futures and spot markets, retail traders generally ignore them, but professional traders favor them because they avoid the continuous changes in contract financing rates.

As investors want more money to withhold the settlement, these fixed-month contracts typically trade at a little premium to spot markets. This isn’t just an issue with crypto markets. As a result, in healthy markets, futures should trade at a 5 percent to 12 percent yearly premium.

The Bitcoin futures premium failed to go above the 5% neutral level, while the Bitcoin price remained steady at $29,000 until June 11th. This is a problematic, bearish red flag indicating a situation known as backwardation whenever this indicator fades or goes negative.

Traders must also study the Bitcoin options markets to check out externalities unique to the futures instrument. The 25 percent delta skew, for example, indicates when Bitcoin market makers and arbitrage desks overpay for upside or downside protection.

Options investors give more considerable odds for a price pump in favorable markets, causing the skew indicator to drop below -12 percent. A market’s universal fear, on the other hand, causes a 12 percent or higher positive skew.

On June 18, the 30-day delta skew reached an all-time high of 36 %, the top-level observed and symptomatic of severely bearish markets. The 18 percent recovery in Bitcoin price since the $17,580 low was apparently enough to rebuild some trust in derivatives traders. While the 25 percent skew signal is still adverse for pricing downside risks, it is no longer at extremes that indicate extreme aversion.

Experts Expect “Maximum Devastation” In The Coming Days

According to several indicators, Bitcoin may have dropped on June 18, mainly since the $20,000 support has obtained support. Market expert Mike Alfred, on the other side, stated emphatically that “Bitcoin is not done liquidating significant players.” They’ll lower it to the point where it causes the most damage to the most overexposed players, such as Celsius.”

The possibilities of another Bitcoin price drop are significant until traders clearly grasp the contagion risk from the Terra ecosystem implosion, Celsius’s likely insolvency, and Three Arrows Capital’s liquidity problems.

 

About the author, Awi Khan

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