Bitcoin futures premium falls to its lowest level in a year, triggering trading alerts
The price of Bitcoin (BTC) increased by 14.4% between March 12 and 13 after it was confirmed that financial regulators had bailed out depositors in the failing Silicon Valley Bank (SVB). The intraday high of $24,610 may not have lasted long, but $24,000 represents a 45% year-to-date increase.
On March 12, US Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg issued a joint statement to reassure SVB depositors.
Regulators also announced a systemic risk exemption for Signature Bank ( SBNY ), an intervention designed to compensate depositors for losses incurred by the former management. Signature Bank was one of the most prominent financial institutions serving the cryptocurrency industry, along with Silvergate Bank, which announced its voluntary liquidation last week.
To avert a major crisis, the Fed and the Treasury Department devised an emergency program to supplement all deposits at Signature Bank and Silicon Valley Bank with funds from the Fed’s emergency lending authority. According to the regulators’ joint statement, “no loss will be borne by the taxpayer,” although the strategy for deploying government funds is questionable.
Stablecoin USD Coin (USDC) also caused significant turmoil in the cryptocurrency industry after breaking below the 1:1 peg to the US dollar on March 10. Fears grew after issuer management company Circle confirmed that $3.3 billion in reserves were held at Silicon Valley Bank.
Such an unusual move caused price distortion across exchanges, prompting Binance and Coinbase to disable the automatic conversion of the USDC stablecoin. The disconnect from $1 bottomed out near $0.87 in the early hours of March 11 and recovered to $0.98 after the FDIC’s successful intervention in SVB was confirmed.
Let’s take a look at Bitcoin derivatives calculations to see where professional traders stand in the current market.
Bitcoin futures calculations turned to extreme fear
Bitcoin quarterly futures are popular with whales and arbitrage tables. These fixed-month contracts typically trade at a small premium to the spot markets, indicating that sellers are asking for more money to delay settlement for a longer period.
As a result, futures contracts in healthy markets should trade at a premium of 5% to 10% on an annual basis – a situation known as contango, which is not unique to crypto markets.
The chart shows that traders had been neutral-to-bearish until March 10 when the underlying indicator fluctuated between 2.5% and 5%. However, the situation quickly changed in the early hours of March 11 when stablecoin USDC was disconnected, forcing cryptocurrency exchanges to change their conversion mechanisms.
Consequently, Bitcoin’s 3-month futures premium was turned into a discount, otherwise known as backwardation. Such a movement is highly unusual and reflects investors’ lack of confidence in intermediaries or extreme pessimism towards the underlying asset. Even as the USDC stablecoin price approaches $0.995, the current 0% premium indicates a lack of influence on the buying demand for Bitcoin via futures instruments.
Related: Crypto investment products see biggest exit on record amid SVB collapse
Crypto-fiat gateways are key to regaining improved market dynamics
Regaining support at $24,000, Bitcoin has recovered to levels not seen since Silvergate Bank’s share price collapsed on March 1 following delayed filings of its annual 10-K financial report. Also, crypto exchanges and stablecoin providers were forced to suspend US dollar deposits, with the shutdown of Signature Bank affecting OKCoin.
Banking options for crypto firms, including exchanges, are likely to become more limited as traditional banks remain wary of the sector. According to some analysts, US regulators are purposefully discouraging large banks from doing business with cryptocurrency exchanges.
Fiat gateway on and off ramps are essential for stablecoins, market markers and cryptocurrency exchanges for a number of reasons. The ability to convert Bitcoin to cash and vice versa is critical to their day-to-day operations, so the longer it takes to find new banking partners, the more difficult it is for stablecoins to allow redemptions and exchanges to maintain a high level of liquidity.
Derivatives calculations may have recovered from the initial risk of contagion in the banking crisis, but they still indicate Bitcoin bulls’ lack of confidence in a long-term recovery.
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.
