Bitcoin (BTC) has been below $45,000 for 14 days and is currently 40% below the all-time high of $69,000. The move bears similarities to late September 2021, when the bitcoin price held steady for 11 days and was 36% lower than the previous all-time high of $64,900 on April 14.
To understand whether the current price momentum is mimicking late September, traders should start by analyzing the premium for Bitcoin futures, also known as the “base.” Unlike a perpetual contract, these fixed-calendar futures contracts do not have a financing rate, so their price will differ significantly from regular spot exchanges.
By measuring the expense gap between the futures contract and the regular spot market, a trader can gauge the level of an upward trend in the market. Excessive optimism from buyers tends to enter three-month futures contracts to trade at 15% or higher on an annual premium (basis).
For example, earlier in September, the underlying price ranged from 9% to 13%, indicating confidence, but on September 29, right before Bitcoin broke above $45,000, the premium on the 3-month futures contract was 6.5%. In general, readings below 5% are bearish, so a reading of 6.5% in late September means that investors are showing low confidence.
In terms of current market conditions, there are a lot of similarities to September 2021, before Bitcoin broke $45,000 and started a 62% rally. First, the current 3-month Bitcoin futures premium is at 6.5% and the index has recently ranged from 9% to 11%, reflecting mild optimism.
Unexpected positive market moves happen when investors least expect them and this is exactly the scenario that is happening now. To confirm whether this move is instrument-specific, one must also analyze the options markets. A delta deviation of 25% compares equivalent buy (buy) and put (sell) options. The indicator will turn positive when “fear” prevails because the premium for protective selling options is higher than for buying options.
Related: What is a bear market? Current BTC Price Drop Still Matches Previous Bitcoin Cycles, Analyst Says
The opposite is proven when the market makers are bullish, causing the delta to deviate 25% into negative territory. Readings between negative 8% and positive 8% are considered neutral.
The delta deviation ranged from 25% to near 10% by late September 2021, indicating distress from options traders. Market makers and arbitrage desks were exaggerating opportunities to get protective short positions (bearish).
According to the current delta skew index of 25%, options traders are neutral. However, on January 10, the gauge touched the positive threshold of 8%, indicating a moderate downtrend.
Derivatives metrics show that current market conditions are similar to late September when Bitcoin reversed a 24-day downtrend and started a 62% rally in the next three weeks.
Will this phenomenon repeat itself? Bitcoin bulls certainly hope so.
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