2 key Bitcoin trading indicators suggest BTC is ready for a 62% upside move

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.

Bitcoin price on Coinbase, in US dollars. Source: TradingView

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).

Bitcoin futures premiums for 3 months in September 2021. Source: laevitas.ch

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.

Bitcoin futures premium for 3 months. Source: laevitas.ch

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.

Deribit Bitcoin Options 25% delta drifted in September 2021. Source: laevitas.ch

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).

Deribit Bitcoin Options 25% delta skew. Source: laevitas.ch

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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