Bitcoin derivatives show lack of confidence from bulls

Bitcoin (BTC) has been rallying since mid-July, although the current ascending channel formation has $21,100 support. This pattern has held for 45 days and could potentially drive BTC towards $26,000 in late August.

According to Bitcoin derivatives data, investors are pricing in higher odds of a decline, but recent improvements in the global economic outlook could surprise the bears.

The correlation to traditional assets is the main source of investor mistrust, especially when factoring in recession risks and US-China tensions ahead of House Speaker Nancy Pelosi’s visit to Taiwan. According to CNBC, Chinese officials threatened to take action if Pelosi went ahead.

The US Federal Reserve’s recent interest rate hikes to curb inflation brought further uncertainty to risk assets, limiting crypto price recovery. Investors are betting on a “soft landing”, meaning the central bank will be able to gradually withdraw its stimulus activities without causing significant unemployment or recession.

The correlation calculation ranges from a negative 1, which means that selected markets move in opposite directions, to a positive 1, which reflects a perfect and symmetrical movement. A difference or lack of relationship between the two assets will be represented by 0.

As shown above, the S&P 500 and Bitcoin 40-day correlation currently stands at 0.72, which has been the norm for the past four months.

On-chain analysis confirms long-term bear market

Blockchain analytics firm Glassnode’s August 1 “The Week On Chain” report highlighted Bitcoin’s weak transaction and block space demand similar to the 2018-19 bear market. The analysis suggests that a trend-breaking pattern will be necessary to signal new investor intake:

“Active addresses [14 days moving average] breaking above 950k would signal an increase in activity in the chain, suggesting potential market strength and demand pick-up.”

While blockchain metrics and flows are important, traders should also track how whales and market markers are positioned in the futures and options markets.

Bitcoin derivatives calculations show no signs of “fear” from pro-traders

Retail traders typically avoid monthly futures because of their fixed settlement date and price differential from spot markets. On the other hand, arbitrage tables and professional traders choose monthly contracts due to the lack of a variable funding rate.

These fixed-month contracts typically trade at a slight premium to regular spot markets as sellers demand more money to hold back settlement for longer. Technically known as “contango”, this situation is not exclusive to crypto markets.

In healthy markets, futures should trade at an annual premium of 4% to 8%, enough to compensate for the risk plus the cost of capital. However, according to the data above, Bitcoin’s futures premium has been below 4% since June 1st. The reading is not particularly worrying given that BTC is down 52% year to date.

To rule out externalities specific to the futures instrument, traders must also analyze Bitcoin options markets. For example, the 25% delta bias signals when Bitcoin whales and market makers are overcharging for upside or downside protection.

If option investors fear a Bitcoin price crash, the bias indicator will move above 12%. On the other hand, generalized tension reflects a negative bias of 12%.

The skewness indicator has been below 12% since July 17, considered a neutral range. As a result, options traders price similar risks for both bullish and bearish options. Not even the retesting of the $20,750 support on July 26 was enough to create “fear” in derivatives traders.

Bitcoin derivatives metrics remain neutral despite the rally towards $24,500 on July 30, suggesting that professional traders are not confident of a sustainable uptrend. Thus, data shows that an unexpected move above $25,000 would surprise professional traders. Taking a bullish bet may seem counterintuitive right now, but at the same time it creates an interesting risk-reward situation.

The views and opinions expressed herein are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trade involves risk. You should do your own research when making a decision