Bitcoin has been on a wild ride this year, with the price closing out 2022 at $16,529, and a 45.5% year-to-date gain. This increase in value is largely attributed to the United States Federal Reserve’s inability to curb inflation while raising interest rates to its highest level in 15 years. This has caused an increase in government debt repayments and has put pressure on the budget deficit.
The Fed, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency released a joint statement on February 23rd, encouraging U.S. banks that rely on funding from the crypto sector to prevent liquidity runs by maintaining strong risk management practices. This was in response to the recent volatility seen in the industry.
In order to better understand how professional traders are positioned in the current market conditions, let’s take a look at derivatives metrics. Margin markets provide insight into how professional traders are positioned, as it allows investors to borrow cryptocurrency to leverage their positions. For example, one can increase exposure by borrowing stablecoins to buy (long) Bitcoin. On the other hand, Bitcoin borrowers can only bet against (short) the cryptocurrency.
On February 21st, the OKX stablecoin/BTC margin lending ratio increased, signaling that professional traders added leverage long positions as Bitcoin price broke below $24,000. This could be seen as a desperate move after the failed attempt to break the $25,000 resistance, however, the unusually high stablecoin/BTC margin lending ratio tends to normalize after traders deposit additional collateral after a few days.
Options traders are also providing insight into the current market conditions. The 25% delta skew is a telling sign whenever arbitrage desks and market makers overcharge for upside or downside protection. This indicator compares similar call (buy) and put (sell) options and will turn positive when fear is prevalent because the protective put options premium is higher than risk call options. A skew reading at -5% denotes a balanced demand between bullish and bearish option instruments.
The 25% delta skew shifted slightly negative since February 18th after option traders became more confident and the $23,500 support strengthened. This is a good sign, as it indicates that traders are not overly fearful of a Bitcoin price crash.
Derivatives data paints an unusual combination of excessive margin demand for longs and a neutral risk assessment from options traders. Yet, there is nothing concerning about it as long as the stablecoin/BTC ratio returns to levels below 30 in the coming days.
Regulators have been applying enormous pressure on the crypto sector, however, Bitcoin derivatives are holding up nicely. On February 22nd, the Bank for International Settlements general manager Agustín Carstens emphasized the need for regulation and risk management in the crypto space, yet the limited impact of the BIS statement on the price is a bullish sign and it possibly increases the odds of Bitcoin price breaking above $25,000 in the short-term.
Overall, derivatives data provides a good indication of how the market is positioned and what traders are expecting in the short-term. The excessive demand for bullish margin positioning and the neutral risk assessment from options traders shows that professional traders are expecting a short-term rally to $25,000.
However, investors should always remember to conduct their own research when making a decision and be aware of the risks associated with trading and investing in cryptocurrencies. As with any investment, there is always the risk of losing money, so it is important to be aware of the potential for losses. It is also important to be aware of the regulatory environment and the potential for changes in the future.
