Hawkish Fed comments and Bitcoin derivatives data point to further BTC downside
A $750 pump on August 26 took Bitcoin (BTC) from $21,120 to $21,870 in less than two hours. However, the move was completely erased after comments from US Federal Reserve Chairman Jerome Powell reiterated the bank’s commitment to contain inflation by tightening the economy. After Powell’s speech, the BTC price fell as low as $20,700.
At Jackson Hole, Powell specifically mentioned that “the historical record strongly cautions against loosening policy prematurely.” Immediately after these comments, the US stock market indices reacted negatively, with the S&P 500 falling 2.2% in an hour.
On the Bitcoin chart, the affectionate “Bart candle”, a reference to the shape of Bart Simpson’s head, and a description of BTC’s up and down price action, appeared. Outside of these unpredictable technical analysis indicators, there are other indicators that pointed to Bitcon’s broader neutral-to-bearish sentiment.
Regulators are picking up the pace on crypto legislation
The news flow for cryptocurrencies has been negative for a long time, and this is also weighing on investor sentiment. On August 24, the US Federal Deposit Insurance Corporation (FDIC) issued termination letters to five companies for allegedly making false representations about deposit insurance related to cryptocurrencies, including FTX US.
On August 25, India-based crypto exchange CoinSwitch had its premises searched by anti-money laundering agents due to alleged violations of foreign exchange laws. Launched in India in 2020, CoinSwitch raised capital from Coinbase Ventures, Andreessen Horowitz, Sequoia and Tiger Global.
Finally, on August 26, the US Securities and Exchange Commission postponed a decision on a Bitcoin spot exchange-traded fund (ETF) from global investment firm VanEck. Although the odds of approval were low, it reinforced anti-crypto sentiment from the regulator.
Consequently, crypto investors face persistent uncertainty despite the seemingly helpful inflation scenario, which should favor supply-constrained assets. For this reason, it is important to analyze crypto derivatives to understand whether investors have priced in higher odds of a decline.
Pro traders were neutral-to-bearish ahead of the dump
Retail traders usually avoid quarterly futures because of their price difference from the spot markets. Nevertheless, they are the preferred instruments of professional traders because they prevent the perpetual swings in funding rates that often occur in a contract.
In healthy markets, the indicator should trade at an annual premium of 4% to 8% to cover costs and associated risks. Yet that hasn’t been the case because the Bitcoin futures premium stayed below 1.8% all along. This data reflects the reluctance of professional traders to add to leveraged long (bull) positions.
Related: CME Bitcoin Futures See Record Discount Amid ‘Very Bearish Sentiment’
One must also analyze the Bitcoin options markets to rule out externalities specific to the futures instrument. For example, 25% delta bias is a clear sign when market makers and arbitrage tables are overcharging for upside or downside protection.
In bear markets, option investors place higher odds on a price dump, causing the bias indicator to rise above 12%. The 30-day delta bias had been near the neutral-to-bearish threshold since August 22, signaling options traders were less inclined to offer downside protection.
These two derivatives calculations suggest that the August 26 Bitcoin price dump may have followed the traditional stock market trend, but crypto traders were definitely not expecting a positive move.
Derivatives data do not lend themselves to bullish interpretations because sentiment worsened after Powell’s comments, and they indicate further weakening market conditions.
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.
