Bitcoin price continues to fall, but derivatives data suggests a short-term rally to $25K
It is possible that many have already forgotten that Bitcoin’s (BTC) price closed 2022 at $16,529 and the recent rally and rejection at the $25,000 level may cause concern among certain investors. Bears are pushing back at the $25,000 level and there have been several failed attempts at the level between February 16th and February 21st. For now, it looks like the $23,500 resistance continues to increase in strength with each retest.
Finding the reasoning behind Bitcoin’s 45.5% year-to-date gain is not obvious, but part of it comes from the US Federal Reserve’s inability to curb inflation while raising interest rates to their highest level in 15 years. The unintended consequence is higher repayments of government debt, and this puts further pressure on the budget deficit.
It’s virtually impossible to predict when the Fed will change its stance, but with the debt-to-GDP ratio exceeding 128, it shouldn’t take more than 18 months. At some point, the value of the US dollar itself may be threatened due to extreme debt leverage.
On February 23, the Fed, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued a joint statement encouraging US banks that rely on funding from the crypto sector to prevent liquidity runs by maintaining strong risk management practices. Regulators said the report was spurred by “recent events” in the industry due to increased volatility risk.
Let’s look at derivatives calculations to better understand how professional traders are positioned in the current market conditions.
Bitcoin margined longs were used to defend the $24,000 level
Margin markets provide insight into how professional traders are positioned because it allows investors to borrow cryptocurrency to leverage their positions.
For example, one can increase exposure by borrowing stablecoins to buy (long) Bitcoin. On the other hand, Bitcoin borrowers can only bet against (short) the cryptocurrency. Unlike futures contracts, the balance between margin longs and shorts is not always matched.
The chart above shows that OKX traders’ margin-lending ratio increased between February 21 and February 23, signaling that professional traders added long positions with leverage as the Bitcoin price broke below $24,000.
One could argue that the excessive demand for bullish margin positioning seems like a desperate move after the failed attempt to break the $25,000 resistance on February 21st. However, the unusually high stablecoin/BTC margin lending rate tends to normalize after traders deposit additional collateral after a few days.
Options traders are more certain of downside risk
Traders should also analyze options markets to understand whether the recent rally has made investors more risk averse. 25% delta bias is a clear sign when arbitrage tables and market makers are charging too much for upside or downside protection.
The indicator compares similar call (buy) and put (sell) options and will turn positive when fear is prevalent because the protective put option premium is higher than risky call options.
In short, the skew will move above 10% if traders fear a Bitcoin price crash. On the other hand, generalized voltage reflects a negative bias of 10%.
Related: IMF board supports crypto policy framework, including no crypto as legal tender
Note that the 25% delta bias turned slightly negative since February 18 after options traders became more confident and the $23,500 support strengthened. A skewed reading of -5% indicates a balanced demand between bullish and bearish options instruments.
Derivatives data paint an unusual combination of excessive margin demand for longs and a neutral risk assessment by options traders. Still, there is nothing to worry about as long as the stablecoin/BTC ratio returns to levels below 30 in the coming days.
Considering that regulators have put enormous pressure on the crypto sector, Bitcoin derivatives are holding up well. For example, on February 22, the Director General of the Bank for International Settlements, AgustÃn Carstens, emphasized the need for regulation and risk management in the crypto space. The limited effect of the BIS statement on the price is a bullish sign, possibly increasing the odds of the Bitcoin price breaking above $25,000 in the near term.
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.
The views, thoughts and opinions expressed herein are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
