derivatives

$29K Bitcoin is closer than you might expect, according to derivatives data

Derivatives data show a clear path to $29,000, but inflation and unemployment data will continue to be crucial to determining BTC price rallies.

Bitcoin (BTC) price continues to battle at the $24,000 resistance and the price was rejected there on Aug. 10, but the rejection was not enough to knock the price out of the 52-day-long ascending channel. The channel has a $22,500 support and this bullish formation suggests that the BTC price will eventually hit the $29,000 level by early October.

*Bitcoin/USD 12-hour price. Source: TradingView*

Bitcoin derivatives data does show a lack of interest from leveraged longs (bulls), but at the same time, it does not price higher odds of a surprise crash. Curiously, the most recent Bitcoin downturn on Aug. 9 was accompanied by a negative performance from U.S.-listed stocks.

On Aug. 8, chip and video graphics card maker Nvidia Corp (NVDA) announced that its 2Q sales would present a 19% drop compared to the previous quarter. Moreover, the U.S. Senate passed a bill on Aug. 6 that could negatively impact corporate earnings. Despite freeing $430 billion to fund “climate, healthcare and tax,” the provision would impose a 1% tax on the stock buyback by publicly traded companies.

The high correlation of traditional assets to cryptocurrencies remains a huge concern for some investors. Investors should not be getting ahead of themselves even if inflationary pressure recedes because the U.S. Fed monitors employment data very closely. The latest reading displayed a 3.5% unemployment typical of overly heated markets, forcing the monetary authority to keep raising interest rates and revoking stimulus debt purchase programs.

Reducing risk positions should be the norm until investors clearly indicate that the U.S. Central Bank is closer to easing the tighter monetary policies. That is precisely why crypto traders are following macroeconomic numbers so closely.

Currently, Bitcoin lacks the strength to break the $24,000 resistance, but traders should study derivatives to gauge professional investors’ sentiment.

Bitcoin derivatives metrics are neutral-to-bearish

The Bitcoin futures annualized premium measures the difference between longer-term futures contracts and the current spot market levels. The indicator should run between 4% to 8% to compensate traders for “locking in” the money until the contract expiry. Thus, levels below 2% are extremely bearish, while the numbers above 10% indicate excessive optimism.

*Bitcoin 3-month futures’ annualized premium. Source: Laevitas*

The above chart shows that this metric dipped below 4% on June 1, reflecting traders’ lack of demand for leverage long (bull) positions. However, the present 2% reading is not particularly concerning, given that BTC is down 51% year-to-date.

To exclude externalities specific to the futures instrument, traders must also analyze Bitcoin options markets. The 25% delta skew is a telling sign whenever arbitrage desks and market makers overcharge for upside or downside protection.

If those traders fear a Bitcoin price crash, the skew indicator will move above 12%. On the other hand, generalized excitement reflects a negative 12% skew.

*Bitcoin 30-day options 25% delta skew: Source: Laevitas*

Data shows that the skew indicator has been ranging between 3% and 5% since Aug. 5, which is deemed to be a neutral area. Options traders are no longer overcharging for downside protection, meaning they might lack excitement, but at least they have abandoned the “fear” sentiment seen in the last few months.

Considering Bitcoin’s current ascending channel pattern, Bitcoin investors probably should not worry too much about the lack of buying demand, according to futures market data.

Of course, there is healthy skepticism reflected in derivatives metrics, but the path to a $29,000 BTC price remains clear as long as inflation and employment statistics are under control.

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

2 metrics signal the $1.1T crypto market cap resistance will hold

Despite a handful of the top-80 coins gaining 12% or more over the past week, Tether’s premium in Asia and futures markets activity show buyers lacking confidence.

Cryptocurrencies have failed to break the $1.1 trillion market capitalization resistance, which has been holding strong for the past 54 days. The two leading coins held back the market as Bitcoin (BTC) lost 2.5% and Ether (ETH) retraced 1% over the past seven days, but a handful of altcoins presented a robust rally.

Crypto markets’ aggregate capitalization declined 1% to $1.07 trillion between July 29 and Aug. 5. The market was negatively impacted by reports on Aug. 4 that the U.S. Securities and Exchange Commission (SEC) is investigating every U.S. crypto exchange after the regulator charged a former Coinbase employee with insider trading.

*Total crypto market cap, USD billions. Source: TradingView*

While the two leading cryptoassets were unable to print weekly gains, traders’ appetite for altcoins was not affected. Investors were positively impacted by the Coinbase exchange partnership with BlackRock, the world’s largest financial asset manager, responsible for $10 trillion worth of investments.

Coinbase Prime, the service offered to BlackRock’s clients, is an institutional trading solution that provides trading, custody, financing and staking on over 300 digital assets. Consequently, comparing the winners and losers among the top-80 coins provides skewed results, as 10 of those rallied 12% or more over the past seven days:

*Weekly winners and losers among the top-80 coins. Source: Nomics*

FLOW rallied 48% after Instagram announced support for the Flow blockchain via Dapper Wallet. The social network controlled by Meta (formerly Facebook) is expanding nonfungible token integration.

Filecoin (FIL) gained 38% following the v16 Skyr upgrade on Aug. 2, which hardened the protocol to avoid vulnerabilities.

VeChain (VET) gained 16.5% after some news sources incorrectly announced an Amazon Web Services (AWS) partnership. VeChain Foundation explained that the AWS reference was first cited in a May 9 case study.

Tether premium deteriorated slightly

The OKX Tether (USDT) premium is a good gauge of China-based crypto retail trader demand. It measures the difference between China-based peer-to-peer trades and the United States dollar.

Excessive buying demand tends to pressure the indicator above fair value at 100%, and during bearish markets, Tether’s market offer is flooded, causing a 4% or higher discount.

*Tether (USDT) peer-to-peer vs. USD/CNY. Source: OKX*

Currently, the Tether premium stands at 98.4%, its lowest level since June 10. While distant from retail panic selling, the indicator showed a modest deterioration over the past week.

However, weaker retail demand is not worrisome, as it partially reflects the total cryptocurrency capitalization being down 69% year-to-date.

Futures markets show mixed sentiment

Perpetual contracts, also known as inverse swaps, have an embedded rate usually charged every eight hours. Exchanges use this fee to avoid exchange risk imbalances.

A positive funding rate indicates that longs (buyers) demand more leverage. However, the opposite situation occurs when shorts (sellers) require additional leverage, causing the funding rate to turn negative.

*Accumulated perpetual futures funding rate on Aug. 5. Source: Coinglass*

As depicted above, the accumulated seven-day funding rate is either slightly positive or neutral for the largest cryptocurrencies by open interest. Such data indicates a balanced demand between leverage longs (buyers) and shorts (sellers).

Considering the absence of Tether demand in Asia and mixed perpetual contract premiums, there is a lack of confidence from traders as the total crypto capitalization struggles with the $1.1 trillion resistance. So, presently, bears seem to have the upper hand considering the uncertainties caused by the SEC pressing charges against a former Coinbase manager.

3 key Ether derivatives metrics suggest $1,600 ETH support lacks strength

Data shows Ether options traders are less bearish than before, but lower gas fees and smart contract deposits give ETH bulls little hope.

Ether (ETH) price is up 60% since May 3, outperforming leading cryptocurrency Bitcoin (BTC) by 32% over that span. However, evidence suggests the current $1,600 support lacks strength as network use and smart contract deposit metrics weakened. Moreover, ETH derivatives show increasing sell pressure from margin traders.

The positive price move was primarily driven by growing certainty of the Merge, which is Ethereum’s transition to a proof-of-stake (PoS) consensus network. During the Ethereum core developers conference call on July 14, developer Tim Beiko proposed Sept. 19 as the tentative target date for the Merge. In addition, analysts expect the new supply of ETH to be reduced by up to 90% after the network’s monetary policy change, thus creating a bullish catalyst.

Ethereum’s total value locked (TVL) has vastly benefited from Terra’s ecosystem collapse in mid-May. Investors shifted their decentralized finance (DeFi) deposits to the Ethereum network thanks to its robust security and battle-tested applications, including MakerDAO (MKR) — the project behind the DAI stablecoin.

*Total value locked by market share. Source: Defi Llama*

Currently, the Ethereum network holds a 59% market share of TVL, up from 51% on May 3, according to data from Defi Llama. Despite gaining share, Ethereum’s current $40 billion deposits on smart contracts seem small compared to the $100 billion seen in December 2021.

Demand for decentralized application (DApp) use on Ethereum seems to have weakened, considering the median transfer fees, or gas costs, which currently stand at $0.90. That’s a sharp drop from May 3, when the network transaction costs surpassed $7.50 on average. Still, one might argue that higher use of layer-two solutions such as Polygon and Arbitrum are responsible for the lower gas fees.

Options traders are neutral, exiting the “fear” zone

To understand how whales and market makers are positioned, traders should look at Ether’s derivatives market data. In that sense, the 25% delta skew is a telling sign whenever professional traders overcharge for upside or downside protection.

If investors expect Ether’s price to rally, the skew indicator moves to -12% or lower, reflecting generalized excitement. On the other hand, a skew above 12% shows reluctance to take bullish strategies, typical of bear markets.

*Ether 30-day options 25% delta skew: Source: Laevitas.ch*

For reference, the higher the index, the less inclined traders are to price downside risk. As displayed above, the skew indicator exited “fear” mode on July 16 as ETH broke above the $1,300 resistance. Thus, those option traders no longer have higher odds of a market downturn as the skew remains below 12%.

Margin traders are reducing their bullish bets

To confirm whether these movements were confined to the specific options instrument, one should analyze the margin markets. Lending allows investors to leverage their positions to buy more cryptocurrency. When those savvy traders open margin longs, their gains (and potential losses) depend on Ether’s price increase.

Bitfinex margin traders are known for creating position contracts of 100,000 ETH or higher in a very short time, indicating the participation of whales and large arbitrage desks.

*Bitfinex ETH margin longs. Source: Coinglass*

Ether margin longs peaked at 500,000 ETH on July 2, the highest level since November 2021. However, data shows those savvy traders have reduced their bullish bets as the ETH price recovered some of its losses. Data shows no evidence of Bitfinex margin traders anticipating the 65% correction from May to sub-$1,000 in mid-June.

Options risk metrics show pro traders are less fearful of a potential crash, but at the same time, margin markets players have been unwinding bullish positions as the ETH price tries to establish a $1,600 support.

Apparently, investors will continue to monitor the impacts of nominal TVL deposits and demand for smart contracts on network gas fees before making additional bullish bets.

Bitcoin bulls aim for $25K price on Friday’s $510M options expiry

BTC price has been gaining momentum as it nears $24,000, and this week’s options expiry could help bulls profit $200 million.

Fifty-one days have passed since Bitcoin (BTC) last closed above $24,000, causing even the most bullish trader to question whether a sustainable recovery is feasible. However, despite the lackluster price action, bulls have the upper hand on Friday’s $510 million BTC options expiry.

*Bitcoin index/USD 1-day price. Source: TradingView*

Investors have been reducing their risk exposure as the Federal Reserve raises interest rates and unwinds its record $8.9 trillion balance sheet. As a result, the Bloomberg Commodity Index (BCOM), which measures price changes in crude oil, natural gas, gold, corn and lean hogs, has traded down 9% in the same period.

Traders continue to seek protection via U.S. Treasuries and cash positions as San Francisco Fed president Mary Daly said on Aug. 2 that the central bank’s fight against inflation is “far from done.” With that being said, the tighter monetary impact on inflation, employment levels and the global economy are yet to be seen.

Bearish bets are mostly below $22,000

Bitcoin’s recovery above $22,000 on July 27 took bears by surprise because only 28% of the put (sell) options for Aug. 5 have been placed above such a price level. Meanwhile, Bitcoin bulls may have been fooled by the $24,500 pump on July 30, as 59% of their bets lay above $25,000.

*Bitcoin options aggregate open interest for Aug. 5. Source: CoinGlass*

A broader view using the 1.60 call-to-put ratio shows more bullish bets because the call (buy) open interest stands at $315 million against the $195 million put (sell) options. Nevertheless, as Bitcoin currently sits above $23,000, most bearish bets will likely become worthless.

For instance, if Bitcoin’s price remains above $23,000 at 8:00 am UTC on Aug. 5, only $19 million worth of these put (sell) options will be available. This difference happens because there is no use in a right to sell Bitcoin at $22,000 or $20,000 if it trades above that level on expiry.

Bulls might pocket a $200 million profit

Below are the four most likely scenarios based on the current price action. The number of options contracts available on Aug. 5 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

Between $20,000 and $22,000: 100 calls vs. 3,700 puts. The net result favors bears by $75 million.
Between $22,000 and $24,000: 1,400 calls vs. 1,600 puts. The net result is balanced between call (buy) and put (sell) instruments.
Between $24,000 and $25,000: 3,800 calls vs. 100 puts. The net result favors bulls to $90 million.
Between $25,000 and $26,000: 0 calls vs. 7,900 puts. Bulls extend their gains to $200 million.

This crude estimate considers the call options used in bullish bets and the put options exclusively in neutral-to-bearish trades. Even so, this oversimplification disregards more complex investment strategies.

Bears have less margin required to suppress Bitcoin price

Bitcoin bulls need to push the price above $24,000 on Aug. 5 to secure a $90 million profit. On the other hand, the bears’ best-case scenario requires pressure below $22,000 to set their gains at $75 million.

However, Bitcoin bears had $140 million leverage short positions liquidated on July 26-27, according to data from Coinglass. Consequently, they have less margin required to push the price lower in the short term.

The most probable scenario is a draw, causing the Bitcoin price to range between $22,000 and $24,000 ahead of the Aug. 5 options expiry.

Bitcoin derivatives show a lack of confidence from bulls

High correlation to stock markets and recession risks limit optimism on the part of BTC investors.

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

According to Bitcoin derivatives data, investors are pricing higher odds of a downturn, but recent improvements in global economic perspective might take the bears by surprise.

The correlation to traditional assets is the main source of investors’ distrust, especially when pricing in recession risks and tensions between the United States and China ahead of House Speaker Nancy Pelosi’s visit to Taiwan. According to CNBC, Chinese officials threatened to take action if Pelosi moved forward.

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

The correlation metric ranges from a negative 1, meaning select markets move in opposite directions, to a positive 1, which reflects a perfect and symmetrical movement. A disparity or a lack of relationship between the two assets would be represented by 0.

*S&P 500 and Bitcoin/USD 40-day correlation. Source: TradingView*

As displayed 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 corroborates longer-term bear market

Blockchain analytics firm Glassnode’s “The Week On Chain” report from Aug. 1 highlighted Bitcoin’s weak transaction and the demand for block space resembling the 2018–19 bear market. The analysis suggests a trend-breaking pattern would be required to signal new investor intake:

“Active Addresses [14 days moving average] breaking above 950k would signal an uptick in on-chain activity, suggesting potential market strength and demand recovery.”

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 metrics show no signs of “fear” from pro traders

Retail traders usually avoid monthly futures due to their fixed settlement date and price difference from spot markets. On the other hand, arbitrage desks and professional traders opt for monthly contracts due to the lack of a fluctuating funding rate.

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

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

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

If option investors fear a Bitcoin price crash, the skew indicator would move above 12%. On the other hand, generalized excitement reflects a negative 12% skew.

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

Bitcoin derivatives metrics remain neutral despite the rally toward $24,500 on July 30, suggesting that professional traders are not confident in a sustainable uptrend. Thus, data shows that an unexpected move above $25,000 would take professional traders by surprise. Taking a bullish bet might seem contrarian right now, but simultaneously, it creates an interesting risk-reward situation.

$1.26B in Ethereum options expire on Friday and bulls are ready to push ETH price higher

Ethereum network developers confirmed September as the date of the upcoming Merge, a move which prompted traders to flip long on ETH.

Ether’s (ETH) 53% rally between July 13 and 18 gave bulls an edge in July’s $1.26 billion monthly options expiry. The move happened as Ethereum developers set a tentative date for the “Merge,” a transition out of the burdensome proof-of-work (PoW) mining mechanism .

*Ether USD price index, 12-hour chart. Source: TradingView*

According to some analysts, by removing the additional ETH issuing used to finance the energy cost required on traditional mining consensus, Ether could finally achieve the “ultra-sound money” status.

On Beacon Chain, the issuance will be around 1,600 ETH per day decreasing the inflation significantly from 13,000 ETH per day on PoW.

Merge sets effects on monetary policies of Ethereum to become Ultrasound money.

(10/15) pic.twitter.com/9hWjhuGpNK

— Akshay Jain (@akshayjain865) July 25, 2022

Whether or not sound monetary policy revolves around constantly changing the issuing and burning rules remains an open question, but there’s no doubt that the Ethereum developers’ video call on July 14 helped to catapult ETH price.

On July 26, a sudden dramatic spike in Ethereum network active addresses raised multiple speculations about whether Ether is targeting its previous all-time high. Analytics firm Santiment reported that the number of 24-hour daily active addresses reached 1.06 million, breaking the previous 718,000 high set back in 2018. Theories such as “Binance doing a maintenance sweep” emerged, but nothing has been confirmed yet.

The main victims of Ether’s impressive 20% recovery on July 27 were leveraged bearish traders (shorts) who faced $335 million in aggregate liquidations at derivatives exchanges, according to data from Coinglass.

Bears placed their bets below $1,600

The open interest for Ether’s July monthly options expiry is $1.27 billion, but the actual figure will be lower since bears were overly-optimistic. These traders got too comfortable after ETH stood below $1,300 between June 13 and 16.

The pump above $1,500 on July 27 surprised bears because only 17% of the put (sell) options for July 29 have been placed above that price level.

*Ether options aggregate open interest for July 29. Source: CoinGlass*

The 1.39 call-to-put ratio shows the dominance of the $730 million call (buy) open interest against the $530 million put (sell) options. Nevertheless, as Ether stands near $1,600, most bearish bets will likely become worthless.

If Ether’s price remains above $1,500 at 8:00 am UTC on July 29, only $80 million put (sell) options will be available. This difference happens because a right to sell Ether at $1,500 or lower is worthless if Ether trades above that level on expiry.

Bulls are comfortable even below $1,600

Below are the four most likely scenarios based on the current price action. The number of options contracts available on July 29 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

Between $1,400 and $1,500: 120,400 calls vs. 80,400 puts. The net result favors the call (bull) instruments by $60 million.
Between $1,500 and $1,600: 160,500 calls vs. 55,000 puts. The net result favors bulls by $160 million.
Between $1,600 and $1,700: 187,100 calls vs. 43,400 puts. The net result favors the call (bull) instruments by $230 million.
Between $1,700 and $1,800: 220,800 calls vs. 40,000 puts. Bulls’ advantage increases to $310 million.

This crude estimate considers the put options used in bearish bets and the call options exclusively in neutral-to-bullish trades. Even so, this oversimplification disregards more complex investment strategies.

For example, a trader could have sold a put option, effectively gaining positive exposure to Ether above a specific price, but unfortunately, there’s no easy way to estimate this effect.

Bears should throw in the towel and focus on the August expiry

Ether bulls need to sustain the price above $1,600 on July 29 to secure a decent $230 million profit. On the other hand, the bears’ best case scenario requires a push below $1,500 to reduce the damage to $60 million.

Considering the brutal $330 million leverage short positions liquidated on July 26 and 27, bears should have less margin to pressure ETH price lower. With this said, bulls are better positioned to continue driving ETH higher after the July 29 monthly options expiry.

Bitcoin rallies after Fed interest rate hike, but bears can still win Friday’s $1.76B options expiry

BTC bears aim for a $360 million profit in July 29’s $1.76 billion monthly options expiry, but the FOMC interest rate decision could play a decisive factor.

Bitcoin’s (BTC) price has been stuck in a descending channel since July 20 and it is currently heading toward the $20,000 support by the end of July. Adding to this bearish price action, BTC is down 50% year-to-date, while U.S. listed tech stocks, as measured by the Nasdaq-100 index, accumulated a 24% loss.

*Bitcoin USD price index, 4-hour. Source: TradingView*

As the U.S. Federal Reserve tightens its economic policies by raising interest rates and scaling back debt asset purchases, risk assets have reacted negatively. Fed chair Jerome Powell is set to wrap up a two-day meeting on July 27 and market analysts expect a nominal 0.75% interest rate hike.

Tensions in Europe escalate as the Russian state-controlled gas company Gazprom is slated to cut supplies to the Nord Stream 1 pipeline starting on July 27. According to CNBC, the company blames a turbine maintenance issue, but European officials think otherwise.

Aiding tech stocks’ performance on July 27 was the U.S. Senate approval of the “Chips and Science” bill, which provides $52 billion in subsidies backed by debt and taxes for U.S. semiconductor production. An additional $24 billion of credits for the sector is estimated, aiming to boost the research to compete with China.

For these reasons, traders have mixed feelings about the upcoming Fed announcement and the impact of a global crisis on cryptocurrency markets. As long as Bitcoin’s correlation to traditional markets remains high, especially tech stocks, investors will seek protection by moving away from risk-on asset classes such as cryptocurrencies.

Bulls placed their hope on $24,000 and higher

The open interest for the July 29 Bitcoin monthly options expiry is $1.76 billion, but the actual figure will be lower since bulls were caught by surprise as BTC failed to break the $24,000 resistance on July 20.

*Bitcoin options aggregate open interest for July 29. Source: CoinGlass*

The 1.18 call-to-put ratio reflects the $950 million call (buy) open interest against the $810 million put (sell) options. Nevertheless, as Bitcoin stands below $23,000, most of the bullish bets will likely become worthless.

For instance, if Bitcoin’s price remains below $23,000 on July 29, bulls will only have $145 million worth of these call (buy) options. This difference happens because there is no use in a right to buy Bitcoin at $23,000 if it trades below that level on July 29 at 8:00 am UTC.

Bears can secure a $360 million profit on Friday

Below are the four most likely scenarios based on the current price action. The number of options contracts available on July 29 for call (buy) and put (sell) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

Between $19,000 and $20,000: 400 calls (buy) vs. 19,300 puts (sell). The net result favors bears by $360 million.
Between $20,000 and $22,000: 3,900 calls (buy) vs. 11,800 puts (sell). Bears have a $230 million advantage.
Between $22,000 and $24,000: 10,300 calls (buy) vs. 8,600 puts (sell). The net result is balanced between bulls and bears.
Between $24,000 and $25,000: 14,400 calls (buy) vs. 7,100 puts (sell). Bulls have a $175 million advantage.

For example, a trader could have sold a call option, effectively gaining negative exposure to Bitcoin above a specific price, but unfortunately, there’s no easy way to estimate this effect.

Bitcoin bears need to pressure the price below $20,000 on July 29 to secure a $360 million profit. On the other hand, bulls can avoid a loss by pushing BTC above $22,000, balancing the valid bets from both sides. Bulls seem heavily vested to put their losses behind and start August with a clean sheet, but it could still go either way.

CME crypto futures see record activity during bear market

The trading of Bitcoin and Ether futures on CME remained elevated in the second quarter, with daily open interest hitting all-time highs.

Bitcoin (BTC) and Ether (ETH) derivatives contracts offered by CME Group saw record activity in the second quarter, offering tangible evidence that professional traders were still accessing digital assets during the bear market.

The average daily open interest (OI) across CME’s crypto futures products reached 106,200 contracts in the second quarter, the highest on record, the company disclosed Thursday. In futures markets, OI reflects the total number of derivatives contracts that have not been settled.

In terms of average daily volume, Bitcoin futures saw 10,700 contracts traded in the second quarter; Ether’s daily volume was 6,100 contracts.

During the week of June 21, large open interest holders (LOIH) accessing CME Group’s crypto products reached a high of 404, signaling “growing interest from institutional and large sophisticated investors,” the company said.

Recession or no recession? Bitcoin traders diverge from the Fed as BTC gains. https://t.co/AeLWgl5zbj

— Cointelegraph (@Cointelegraph) July 28, 2022

Despite extreme market volatility for Bitcoin and Ether, CME Group’s crypto futures products have been “a haven of consistent liquidity with continued volume and open interest growth for investors,” Tim McCourt, CME’s global head of equity and FX products, said, adding:

“The variety of products, including the smaller sized micro bitcoin and micro ether futures and options, offers enhanced flexibility and trading precision for a range of market participants, including large institutions as well as sophisticated, active traders.”

In 2017, CME Group became the second derivatives marketplace to offer Bitcoin futures contracts, trailing its cross-town rival CBOE Global Markets by one week. By the end of 2020, CME’s cumulative Bitcoin futures volume reached $100 billion.

The derivatives exchange has since gone on to launch several crypto derivatives products, including micro-sized Bitcoin and Ether options. These contracts are 10% the size of their respective crypto assets, giving traders more opportunities to hedge their exposure.

On Thursday, CME revealed that its Micro BTC product saw an average daily volume of 17,400 contracts in the second quarter. Daily volume for its ETH-equivalent micro contract was 21,300.

Fed policy and crumbling market sentiment could send the total crypto market cap back under $1T

Data shows investors jumping back into fiat and a lack of bullish leverage in the crypto market suggests another correction is in the making.

The total crypto market capitalization broke above $1 trillion on July 18 after an agonizing thirty-five-day stint below the key psychological level. Over the next seven days, Bitcoin (BTC) traded flat near $22,400 and Ether (ETH) faced a 0.5% correction to $1,560.

*Total crypto market cap, USD billion. Source: TradingView*

The total crypto capitalization closed July 24 at $1.03 trillion, a modest 0.5% negative seven-day movement. The apparent stability is biased toward the flat performance of BTC and Ether and the $150 billion value of stablecoins. The broader data hides the fact that seven out of the top-80 coins dropped 9% or more in the period.

Even though the chart shows support at the $1 trillion level, it will take some time until investors regain confidence to invest in cryptocurrencies and actions from the United States Federal Reserve could have the largest impact on price action.

Furthermore, the sit and wait mentality could be a reflection of important macroeconomic events scheduled for the week ahead. Broadly speaking, worse than expected data tends to increase investors’ expectations of expansionary measures, which are beneficial for riskier assets like cryptocurrency.

The Federal Reserve policy meeting is scheduled for July 26 and 27, and investors expect the United States central bank to raise interest rates by 75 basis points. Moreover, the second quarter of U.S. gross domestic product (GDP) – the broadest measure of economic activity — will be released on July 27.

$1 trillion not enough to instill confidence

Investors sentiment improved from July 18, as reflected in the Fear and Greed Index, a data-driven sentiment gauge. The indicator currently holds 30 out of 100, which is an increase from 20 on July 18 when it hovered in the “extreme fear” zone.

*Crypto Fear and Greed Index. Source: alternative.me*

One must note that even though the $1 trillion total crypto market capitalization was recaptured, traders’ spirits have not improved much. Listed below are the winners and losers from July 17 to 24.

Arweave (AR) faced a 20.6% technical correction after an impressive 58% rally from July 12–18 after the network file-sharing solution surpassed 80 terabytes (TB) of data storage.

Polygon (MATIC) moved down 11.7% after Ethereum co-founder Vitalik Buterin supported the zero-knowledge Rollups technology implementation, a feature currently in the works for Polygon.

Solana (SOL) corrected 9% after the demand for the smart contract network could be negatively impacted by Ethereum’s upcoming migration to a proof-of-stake consensus.

Retail traders are not interested in bullish positions

The OKX Tether (USDT) premium is a good gauge of China-based retail crypto trader demand. It measures the difference between China-based peer-to-peer (P2P) trades and the United States dollar.

Excessive buying demand tends to pressure the indicator above fair value at 100%, and during bearish markets, Tether’s market offer is flooded and causes a 4% or higher discount.

Tether has been trading with a slight discount in Asian peer-to-peer markets since July 4. Not even the 25% total market capitalization rally durinJuly 13–20 was enough to display excessive buying demand from retail traders. For this reason, these investors continued to abandon the crypto market by seeking shelter in fiat currency.

One should analyze crypto derivatives metrics to exclude externalities specific to the stablecoin market. For instance, perpetual contracts have an embedded rate that is usually charged every eight hours. Exchanges use this fee to avoid exchange risk imbalances.

*Accumulated perpetual futures funding rate on July 24. Source: Coinglass*

The derivatives contracts show modest demand for leveraged long (bull) positions on Bitcoin, Ether and Cardano. Still, nothing is out of the norm after a 0.15% weekly funding equals a 0.6% monthly cost, so uneventful. The opposite movement happened on Solana, XRP and Ether Classic (ETC), but it is not enough to raise concern.

As investors’ attention shifts to global macroeconomic data and the Fed’s response to weakening conditions, the window of opportunity for the cryptocurrencies to prove themselves as a solid alternative gets smaller.

Crypto traders are signaling fear and a lack of leverage buying, even in the face of a 67% correction since the November 2021 peak. Overall, derivatives and stablecoin data show a lack of confidence in $1 trillion market capitalization support.

Pro Bitcoin traders are uncomfortable with bullish positions

BTC derivatives used by whales and market makers do not support a continuous price recovery above $24,000.

The previous $19,000 Bitcoin (BTC) support level becomes more distant after the 22.5% gain in nine days. However, little optimism has been instilled as the impact of the Three Arrows Capital (3AC), Voyager, Babel Finance and Celsius crises remain uncertain. Moreover, the contagion has claimed yet another victim after Thai crypto exchange Zipmex halted withdrawals on July 20.

*Bitcoin/USD 1-day price. Source: TradingView*

Bulls’ hopes depend on the $23,000 support strengthening as time goes by, but derivatives metrics show professional traders are still highly skeptical of continuous recovery.

Macroeconomic headwinds favor scarce assets

Some analysts attribute the crypto market strength to China’s lower-than-expected gross domestic product data, causing investors to expect further expansionary measures by policymakers. China’s economy expanded 0.4% in the second quarter versus the previous year, as the country continued to struggle with self-imposed restrictions to curb another outbreak of COVID-19 infections, according to CNBC.

The United Kingdom’s 9.4% inflation in June marked a 40-year high, and to supposedly aid the population, Chancellor of the Exchequer Nadhim Zahawi announced a $44.5 billion (GBP 37 billion) assistance package for vulnerable families.

Under these circumstances, Bitcoin reversed its downtrend as policymakers scrambled to solve the seemingly impossible problem of slowing economies amid ever-increasing government debt.

However, the cryptocurrency sector faces its own issues, including regulatory uncertainties. For instance, on July 21, the United States Securities and Exchange Commission (SEC) labeled nine tokens as “crypto asset securities,” thus not only falling under the regulatory body’s purview but liable for having failed to register with it.

Expressly, the SEC referred to Powerledger (POWR), Kromatika (KROM), DFX Finance (DFX), Amp (AMP), Rally (RLY), Rari Governance Token (RGT), DerivaDAO (DDX), LCX, and XYO. The regulator brought charges against a former Coinbase product manager for “insider trading” after they allegedly used non-public information for personal benefit.

Currently, Bitcoin investors face too much uncertainty despite the seemingly helpful macroeconomic backdrop, which should favor scarce assets such as BTC. For this reason, an analysis of derivatives data is valuable in understanding whether investors are pricing higher odds of a downturn.

Pro traders remain skeptical of price recovery

Retail traders usually avoid quarterly futures due to their price difference from spot markets. Still, they are professional traders’ preferred instruments because they prevent the perpetual fluctuation of contracts’ funding rates.

These fixed-month contracts usually trade at a slight premium to spot markets because investors demand more money to withhold the settlement. But this situation is not exclusive to crypto markets, so futures should trade at a 4% to 10% annualized premium in healthy markets.

The Bitcoin’s futures premium flirted with the negative area in mid-June, something is typically seen during extremely bearish periods. The mere 1% basis rate, or annualized premium, reflects professional traders’ unwillingness to create leverage long (bull) positions. Investors remain skeptical of the price recovery despite the low cost of opening a bullish trade.

One must also analyze the Bitcoin options markets to exclude externalities specific to the futures instrument. For example, the 25% delta skew is a telling sign when market makers and arbitrage desks are overcharging for upside or downside protection.

In bear markets, options investors give higher odds for a price dump, causing the skew indicator to rise above 12%, while the opposite holds true during bullish markets.

The 30-day delta skew peaked at 21% on July 14 as Bitcoin struggled to break the $20,000 resistance. The higher the indicator, the less inclined options traders are to offer downside protection.

More recently, the indicator moved below the 12% threshold, entering a neutral area, and no longer sitting at the levels reflecting extreme aversion. Consequently, options markets currently display a balanced risk assessment between a bull run and another re-test of the $20,000 area.

Some metrics suggest that the Bitcoin cycle bottom is behind us, but until traders have a better view of the regulatory outlook and centralized crypto service providers’ liquidity as the Three Arrows Capital crisis unfolds, the odds of breaking above $24,000 remain uncertain.