Futures

Bullish crypto traders maintain the upper hand despite the total market cap rejecting at $1T

Former BitMEX CEO Arthur Hayes says catastrophe is coming for the crypto sector, but derivatives data shows bulls slowly taking control of the market.

The total crypto market capitalization soared by 29.4% in two weeks, although Bitcoin’s (BTC) price stabilized near $21,000 on Jan. 19.

As a result, it became increasingly difficult to justify that the five-month-long bearish trend still prevails after the $930 billion total crypto channel top has been breached. Still, the psychological $1 trillion resistance remains strong.

*Total crypto market cap in USD, 2-day. Source: TradingView*

The move possibly reflects investors becoming more optimistic about risk assets after weaker-than-expected inflation metrics signaled that U.S. Federal Reserve’s interest rate hiking strategy should ease throughout 2023.

However, Klaas Knot, who serves as the governor of the Dutch central bank, stated on Jan. 19 that the European Central Bank (ECB) “will not stop after a single 50 basis point hike, that’s for sure.”

At the Davos forum, Knot added: “Core inflation has not yet turned the corner in the Euro area.”

In essence, investors fear that another round of interest rate increases could further pressure corporate earnings, triggering unemployment and a deep recession. In this case, a sell-off on the stock market becomes the base scenario and the crypto markets would likely follow the bear trend.

To further prove the strong correlation between cryptocurrencies and the stock markets, the Russell 2000 index declined 3.4% between Jan. 18 and Jan. 19. The movement coincides with the total crypto market capitalization correcting by 4% after flirting with the $1 trillion mark on Jan. 18.

The 10.4% gain in total market capitalization between Jan. 12 and Jan. 19 was impacted mainly by Bitcoin’s 10.4% gains and Ether (ETH), which traded up by 8.7%. The bullish sentiment was more eventful for altcoins, with eight of the top 80 coins gaining 20% or more in the period.

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

Metaverse-related tokens rallied after tech giant Apple announced the upcoming release of its VR headset. Top movers included Decentraland (MANA), up 55%; Enjin (ENJ) rising 37%; and The Sandbox (SAND) climbing 30%.

Frax Share (FXS) rallied 40% as it reached 65,000 Ether deposited on its liquid staking protocol, which currently has over U$100 million in total value locked.

Privacy coins like Monero (XMR) and ZCash (ZEC) both declined after increased regulatory risks and the U.S. Department of Justice announced the arrest of the founder of Bitzlato, a now-shutteredpeer-to-peer crypto exchange.

Demand for leveraged bullish bets rises

Perpetual contracts, also known as inverse swaps, have an embedded rate that is 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.

*Perpetual futures accumulated 7-day funding rate on Jan. 19. Source: Coinglass*

The seven-day funding rate was positive in every instance, meaning the data points to a higher demand for leverage longs (buyers) in the period. Still, being charged 0.25% per week to maintain their bullish trades opened should not be a significant concern for most investors.

Thus, traders should analyze the options markets to understand whether whales and arbitrage desks have placed higher bets on bullish or bearish strategies.

Investors are not afraid of dips, according to BTC options

Traders can gauge the market’s overall sentiment by measuring whether more activity is going through call (buy) options or put (sell) options. Generally speaking, call options are used for bullish strategies, whereas put options are for bearish ones.

A 0.70 put-to-call ratio indicates that put options open interest lag the more bullish calls by 30% and is therefore bullish. In contrast, a 1.40 indicator favors put options by 40%, which can be deemed bearish.

*BTC options volume put-to-call ratio. Source: Laevitas*

Even though Bitcoin failed to break the $21,500 resistance on Jan. 18, there were no signs of increased demand for downside protection. This becomes evident as the put-to-call volume remained below 0.80 the entire time, even after the negative 5.5% move on Jan. 18.

The neutral-to-bearish strategies remain strongly in demand in the BTC option markets, favoring call (buy) options by 23%.

Derivatives markets suggest support at the $930 billion level is strong

After solid gains over the past seven days, the cryptocurrency market continues to show resilience despite warnings of a “global financial meltdown” by BitMEX founder Arthur Hayes. This year “could be just as bad as 2022 until the Fed pivots,” Hayes wrote, calling that scenario his “base case.”

According to crypto derivatives metrics, there is hardly any sense of fear or absence of leverage buying demand after the total market capitalization first missed the opportunity to breach the $1 trillion mark. Those are encouraging signs, especially when combined with the technical analysis of the descending channel breakout.

Consequently, the odds favor the previous channel top at $930 billion becoming a strong support level. So, for now, even a downturn in traditional markets should not be a huge concern for crypto bulls, but investors should continue monitoring derivatives metrics.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

What are perpetual futures contracts in cryptocurrency?

A perpetual futures contract does not have an expiration date and aims to profit from the non-delivery of the actual commodity.

Perpetual futures vs. traditional futures

One of the main features of perpetual futures contracts is that they never expire compared to traditional futures contracts.

In traditional futures contracts, a tangible commodity, such as gold, must be delivered in accordance with the contract’s terms and conditions when the futures contract expires. As a result, the gold must be handled physically, adding to the carrying costs — i.e., the cost of storing gold. The time period between the present period and the prospective settlement time of the contract will also affect the gold’s price.

As the gap increases, the potential future price becomes more unpredictable, and the potential price disparity between the spot and traditional futures markets also expands, increasing the contract’s carrying costs. All open positions, however, expire or get settled since the contract price converges with the spot price at settlement.

On the contrary, perpetual contracts do not have a future reference date, unlike conventional futures, where the price of the contract and the value of the underlying asset eventually converge. The perpetual futures’ technique for enforcing market convergence at regular intervals is the funding rate. The funding rate, which is a fee shared by the long and short parties, tries to maintain a contract’s price in line with the spot value of the underlying asset and prevent substantial price fluctuations.

Since perpetual futures trading is unregulated or not authorized by the CFTC, exchanges like BitMEX offering crypto futures contracts are not accessible in the United States. Additionally, one must conduct proper due diligence before getting involved in risky financial instruments like perpetual contracts.

What are the pros and cons of perpetual futures contracts?

Perpetual futures offer high leverage to traders without constantly readjusting their positions and hedging their risks in margin and spot trading. However, such financial instruments are unregulated, meaning that victims are not protected, and defaulters may not be penalized for misconduct.

Perpetual futures trading allows traders to buy or sell an underlying asset without a pre-specified delivery date, reducing the need to repeatedly create a long or short position. However, due to the absence of an expiration date, the counterparty risk is high in the case of such financial instruments.

Moreover, perpetual futures contracts are not authorized by the United States Commodities Futures Trading Commission, which means, in the case of default, the victims won’t get compensated. In addition, because the value of the contract and the underlying asset automatically converge as the expiration date approaches, in the case of traditional futures, there is no need to maintain a price peg.

However, the requirement to tie perpetual contracts to the current market values of the assets they represent makes them complex trading products. Regardless, when the market swings against active orders and open positions, traders can obtain an additional hedge with perpetual futures contracts to limit their risks in margin and spot trading.

How do perpetual futures contracts work?

When the contract price is higher than the price of BTC, users with short positions are paid the funding rate, which is reimbursed by users with long positions, causing the contract price to realign with the price of BTC/USD.

BitMEX, a cryptocurrency exchange that deals in cryptocurrency derivatives, has popularized perpetual contracts like XBTUSD (Perpetual Bitcoin Contract). Using this contract, traders can create leveraged positions that rise or fall in value in response to changes in an index price that represents the United States dollar spot price of Bitcoin (BTC) as determined on a number of different cryptocurrency exchanges.

Index price is the average price of an asset, which is determined by the size of major spot markets and the number of trades on those markets so that traded prices are equal to or extremely close to spot market prices.

Let’s take a hypothetical example to understand how perpetual futures work. Assume that a trader has some BTC. When they purchase the contract, they either want this sum to increase in line with the price of BTC/USD or move in the opposite direction when they sell the contract. Considering that each contract is worth $1, if they purchase one contract at the price of $50.50, they must pay $1 in BTC. Instead, if they sell the contract, they get $1’s worth of BTC at the price they sold it for (it still applies if they sell before they acquire).

It is important to note that the trader is purchasing contracts, not BTC or dollars. So, why should you trade crypto perpetual futures? And how can it be certain that the contract’s price will follow the BTC/USD price?

The answer is via a funding mechanism. Users with long positions are paid the funding rate (compensated by users with short positions) when the contract price is lower than the price of BTC, giving them an incentive to purchase contracts, causing the contract price to rise and realign with the price of BTC/USD. Similarly, users with short positions can purchase contracts to close their positions, which will likely cause the price of the contract to increase to match the price of BTC.

In contrast to this situation, the opposite occurs when the price of the contract is higher than the price of BTC — i.e., users with long positions pay users with short positions, encouraging sellers to sell the contract, which drives its price closer to the price of BTC. The difference between the contract price and the price of BTC determines how much funding rate one will receive or pay.

What are perpetual futures?

In 1992, economist Robert Shiller proposed a cash-settled futures market called perpetual futures that don’t expire and don’t provide delivery or coverage of the traded asset in order to lower the cost of rolling over or directly holding cryptocurrency contracts. However, such contracts are active only in cryptocurrency markets.

In order to gain exposure to an underlying asset or index, a trader can own a perpetual futures contract indefinitely. Since the contracts wouldn’t have a predetermined maturity date, this strategy allows for the creation of futures markets for illiquid assets. Furthermore, unlike equity futures, which are settled by delivering the asset at contract maturity, perpetual futures are always settled in cash — i.e., physical delivery.

In addition, as there is no asset delivery, perpetual futures facilitate trading with high levels of leverage. Leverage is a trading instrument that investors can use to increase their exposure to the market by enabling them to use borrowed funds provided by the broker to make a trade or investment.

Investors can hedge (mitigate risk) and speculate (increase exposure to price movements) on cryptocurrencies with high leverage by using perpetuals, which don’t require taking delivery of any crypto asset and don’t require rolling them over.

In essence, perpetual futures are a contract between long and short counterparties, where the long side must pay the short side an interim cash flow known as the funding rate, and the short side should give the long side some reward based on the futures price’s entrance and exit times.

Perpetual futures contracts’ prices are kept consistent with market values for the underlying assets they follow thanks to the funding rate mechanism. Funding takes place every eight hours — i.e., at 04:00 UTC, 12:00 UTC and 20:00 UTC. Traders can only pay for or get funding if they have a position at one of these times. The premium and interest rate make up the funding rate, which is determined based on the market performance of each instrument.

Except for contracts like BNBUSDT and BNBBUSD, whose interest rates are 0%, Binance Futures’ interest rate is set at 0.01% per funding interval (0.03% per day). The premium, however, fluctuates based on the price distinction between the perpetual contract and the mark price, which represents the fair value of a perpetual futures contract and is an estimation of a contract’s true value when contrasted to its actual trading price.

Moreover, profits and losses are regularly marked to market and credited to each side’s margin account, and both parties are free to enter the arrangement at any time. Marking to market refers to pricing the cryptocurrency asset or any other security at the prevailing current market rate. Variations in an asset’s market value cause traders’ daily settlement of profits and losses.

In addition, due to the lack of staggered trading of contracts with various maturities on the exchange and the trading of a single perpetual futures contract for each underlying asset, this configuration increases the contract’s liquidity.

What are perpetual contracts?

The trading of perpetual contracts is comparable to that of futures contracts; however, in the case of perpetual contracts, the trader has more leverage and does not immediately exchange the underlying assets.

Futures contracts, a type of derivatives instrument, postpone payment and delivery until predetermined future dates, whereas spot contracts are for immediate buying and selling. In contrast, a perpetual contract (which is a type of futures contract) lacks a fixed settlement time and an expiration date.

As long as the maintenance margin is sufficient, traders can hold their long or short positions perpetually. The minimal amount of collateral a user must have in order to maintain open trading positions is known as maintenance margin.

Let’s understand the difference between traditional futures contracts and perpetual contracts through an example. In the case of a futures contract, Alice’s January crude oil futures contract, which she bought for $70 per barrel, is due at expiration regardless of price. As an alternative, if she buys a perpetual contract, she consents to buy crude oil at a later time at $70 per barrel. This guarantee, however, is not time-bound, and she has the option to exit the position whenever she wants and reclaim her margin.

Bitcoin price rallies to $19K, but analyst says a $17.3K retest could happen next

Bitcoin price hit a year-to-date high near $19,000 as pro traders used leverage to propel the pump, but derivatives data hints at reasons for BTC price to retest $17,300.

Bitcoin (BTC) price has gained 15% in the past 13 days, and during this timeframe, traders’ bearish bets in BTC futures were liquidated in excess of $530 million compared to bulls.

After rallying to $19,000 on Jan. 12, Bitcoin reached its highest price since the FTX exchange collapse on Nov. 8. The move was largely fueled by the United States Consumer Price Index (CPI) expectation for December, which matched consensus at 6.5% year-over-year — highlighting that the inflationary pressure likely peaked at 9% in June.

Furthermore, on Jan. 11, FTX attorney Andy Dietderich said $5 billion in cash and liquid cryptocurrencies had been recovered — fueling hopes of partial return of customer funds in the future. Speaking to a U.S. bankruptcy judge in Delaware on Jan. 11, Dietderich stated that the company plans to sell $4.6 billion of non-strategic investments.

Let’s look at derivatives metrics to understand whether professional traders are excited about Bitcoin’s rally to $19,000.

Margin use increased as Bitcoin price rallied to $18,300 and above

Margin markets provide insight into how professional traders are positioned, and margin is beneficial to some investors because it allows them to borrow cryptocurrency to leverage their positions.

For instance, one can increase exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only short the cryptocurrency as they bet on its price declining. Unlike futures contracts, the balance between margin longs and shorts isn’t always matched.

*OKX stablecoin/BTC margin lending ratio. Source: OKX*

The above chart shows that OKX traders’ margin lending ratio firmly increased on Jan. 11, signaling that professional traders added leverage longs as Bitcoin rallied toward $18,300.

More importantly, the subsequent 2% correction on Jan. 12 that led Bitcoin to a $17,920 low marked the complete margin reversal, meaning whales and market makers reduced their bullish positions using margin markets.

Presently at 21, the metric favors stablecoin borrowing by a wide margin, indicating that bears are not confident about opening Bitcoin margin shorts.

Futures traders ignored the Bitcoin price pump

The long-to-short metric excludes externalities that might have solely impacted the margin markets. In addition, it gathers data from exchange clients’ positions on the spot, perpetual and quarterly futures contracts, thus offering better information on how professional traders are positioned.

There are occasional methodological discrepancies between different exchanges, so readers should monitor changes instead of absolute figures.

*Exchanges’ top traders Bitcoin long-to-short ratio. Source: Coinglass*

Even though Bitcoin broke above the $18,000 resistance, professional traders have kept their leverage long positions unchanged, according to the long-to-short indicator.

For instance, the ratio for Binance traders stood firm at 1.08 from Jan. 9 until Jan. 12. Meanwhile, top traders at Huobi reduced their leverage longs as the indicator moved from 1.09 to the present 0.91. Lastly, at crypto exchange OKX, the long-to-short slightly increased favoring longs, moving from 0.95 on Jan. 9 to the current 0.97.

Traders using futures contracts were not confident enough to add leveraged bullish positions despite the price increase.

Bitcoin price could retest $17,300

While the margin data shows that sizable leverage was used to push Bitcoin above $18,000, it suggests that the situation was only temporary. Most likely, those professional traders deposited more margin and consequently reduced their leverage after the event. In essence, the metric looks very healthy because it indicates that margin markets are not overbought.

As for the top trader’s long-to-short, the absence of demand for leverage longs using futures contracts is somewhat concerning, but at the same time, it leaves room for additional purchasing power.

From a derivatives standpoint, even if Bitcoin retests $17,300, the bulls should not be concerned because the derivatives indicators show little demand from short sellers and no excessive leverage from buyers.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Samsung investment arm to launch Bitcoin Futures ETF amid rising crypto interest

Hong Kong investors can now gain exposure to Bitcoin through Samsung’s new ETF listing, launching on Jan. 13.

In Hong Kong, the bell rings for Bitcoin (BTC). Samsung Asset Management Hong Kong (SAMHK), a subsidiary of Samsung’s investment arm Samsung Asset Management, is set to list the “Samsung Bitcoin Futures Active ETF” on the Hong Kong stock market on Jan. 13.

The move comes amid a surge in interest from both the government and institutional investors in the region.

The Hong Kong Stock Exchange. Source: thetradenews.com

The ETF, or exchange-traded fund, will track the spot price of Bitcoin by investing in Bitcoin futures products listed on the Chicago Mercantile Exchange (CME). The ETF will primarily invest in the CME Bitcoin Futures, with some investments in the CME Micro-Bitcoin Futures.

Currently, Hong Kong is the only market in Asia where Bitcoin futures ETFs can be traded. The Samsung Bitcoin Futures ETF joins the Hong Kong Crypto Futures ETF, which began trading to the tune of $70 million in 2022. Other markets worldwide include Canada, the U.S., Australia, and some European countries such as Switzerland.

Park Seong-jin, head of Samsung Asset Management Hong Kong, commented:

“Hong Kong is the only market in Asia where Bitcoin futures ETFs are listed and traded in the institutional market. It will be a new option for investors who are interested in Bitcoin as a competitive product that reflects their experience in risk management.”

This ETF listing will provide retail and institutional investors with a new way to gain exposure to Bitcoin, which may help to attract more mainstream investors to the cryptocurrency space. With Samsung’s reputation and brand power, the ETF could be an attractive option for investors who are looking for a way to invest in Bitcoin without buying and holding their own private keys directly.

The move by Samsung comes as the price of Bitcoin surpassed the $18,000 level, indicating a potential rise in positive sentiment among traders. Other cryptocurrencies have also followed suit, recording a recovery in the broader crypto market.

In 2022, Samsung Asset Management Hong Kong Limited held $1.4 bn assets under management, while the globally recognized brand of Samsung continues to be actively involved in the crypto space. The South Korean company, valued at over $300 billion, boasts a blockchain wallet while the flagship smartphone, Galaxy S22 comes with a preinstalled crypto.

The ETF is a further indication that the global brand is looking to capitalize on the growing interest in cryptocurrencies.

A key change in Ethereum options pricing hints that ETH price could rise beyond $1,350

Ethereum whales and market makers are no longer charging excessive premiums for protective put options, a sign that ETH price could be en route to new highs.

The price of Ethereum’s native cryptocurrency, Ether (ETH), gained 10.2% from Jan. 4 to Jan. 10, breaching the $1,300 resistance without much effort. But has the Ether price move cast a light on whether the altcoin is ready to begin a new uptrend?

Will Ether’s former resistance level turn to support?

After testing the $1,200 support on Jan. 1, the eight-week ascending channel has displayed strength, but Ether bulls fear that negative newsflow might break the pattern to the downside.

*EETH/USD price index, 12-hour. Source: TradingView*

Despite the positive price trend, the sentiment around Ether and other cryptocurrencies hasn’t been very enticing. For example, Xiao Yi, the former Chinese Communist Party secretary of Fuzhou, confessed on Jan. 8 to “acting recklessly” in support of crypto mining. Xiao spoke from what appeared to be a prison, apologizing for causing “grave losses” to the Fuzhou region.

On Jan. 10, South Korean tax agents reportedly raided crypto exchange Bithumb’s offices to explore a potential tax evasion case. On Dec. 30, Park Mo — an executive at Bithumb’s parent company — was found dead, though he was under investigation for embezzlement and stock price manipulation.

Also on Jan. 10, Cameron Winklevoss, co-founder of the Gemini exchange, issued an open letter to Barry Silbert, CEO of Digital Currency Group. In the letter, Winklevoss makes some serious fraud accusations and requests that the Grayscale fund management holding company dismiss Silbert to provide a resolution for Gemini’s Earn users.

The ongoing crypto winter left another scar on Jan. 10 as the leading U.S. cryptocurrency exchange, Coinbase, announced a second round of layoffs, impacting 20% of the workforce.

However, the exchange’s CEO, Brian Armstrong, tried to minimize the damage by stating that Coinbase remains “well capitalized” and tranquilize investors with business-as-usual messages.

Consequently, some investors believe Ether could revisit prices below $600 as fear remains the prevalent sentiment. For instance, trader Crypto Tony expects the current triangle formation to cause another “leg down later this year.”

$ETH / $USD – Update

Unless we take out $2,200 on the macro level I am treating this as consolidation for a B or X wave, before we get one more leg down later this year

Volume is contracting and I also expect this to dwindle down lower. Pay attention pic.twitter.com/LTik7GXEYa

— Crypto Tony (@CryptoTony__) January 10, 2023

Let’s look at Ether derivatives data to understand if the bearish newsflow has caused traders to avoid leverage longs and neutral-to-bullish option strategies.

Leveraged bulls lagged the recent rally

Retail traders usually avoid quarterly futures due to their price difference from spot markets. Meanwhile, professional traders prefer these instruments because they prevent the fluctuation of funding rates in a perpetual futures contract.

The two-month futures annualized premium should trade between +4% and +8% in healthy markets to cover costs and associated risks. When the futures trade at a discount versus regular spot markets, it shows a lack of confidence from leverage buyers, which is a bearish indicator.

*Ether 2-month futures annualized premium. Source: Laevitas*

The chart above shows that derivatives traders using futures contracts exited the negative premium on Jan. 1, meaning the extreme bearish sentiment is gone. However, the current 1.5% premium remains below the 4% threshold for a neutral market. Still, the absence of leverage buyers’ demand does not mean traders expect a sudden market downturn.

For this reason, traders should analyze Ether’s options markets to understand whether investors are effectively pricing in odds of a $600 retest.

Options traders have stopped overcharging for downside protection

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 10%. On the other hand, bullish markets tend to drive the skew indicator below -10%, meaning the bearish put options are discounted.

*Ether 60-day options 25% delta skew: Source: Laevitas*

The delta skew currently sits at 11% after flirting with the neutral range on Jan. 9, meaning that whales and market makers no longer charge excessive premiums for protective put options. That is a stark contrast from late 2022 when those trades were running up to 19% more costly than equivalent bullish strategies using options.

Overall, both options and futures markets point to pro traders becoming more confident and increasing the odds of $1,300 becoming a support level. So, even if the newsflow doesn’t seem appealing, traders are unwilling to add bearish bets, which might fuel further positive momentum for Ether.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

Bitcoin derivatives data suggests a BTC price pump above $18K won’t be easy

The BTC futures premium remains a topic of concern, but it appears that traders are starting to price similar risks for the upside and downside.

Traders might rejoice now that Bitcoin price ventured above $17,400, but 27 long days have passed since Bitcoin (BTC) last breached the $17,250 resistance.

On December 13, after a two-week-long lateral movement, Bitcoin posted a 6.5% rally toward $18,000 and even though the current movement still lacks strength, traders believe that a retest of the $18,250 resistance remains possible.

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

To start the week, the S&P 500 index rose to its highest level in 26 days on Jan. 9. Weak economic data had previously fueled investors’ expectation of slower interest rate hikes by the U.S. Federal Reserve and the Jan. 12 Consumer Price Index (CPI) report could lend some credence to this expectation.

On Jan. 6, German retail sales data showed a 5.9% year-on-year contraction took place in November. In the U.S., economic activity in the services sector contracted in December after 30 consecutive months of growth. The Services Purchasing Manager’s Index (PMI) reading was 49.6%, and readings below 50% typically point toward a weakening economy.

Investors anxiously wait for the Consumer Price Index (CPI) release on Jan. 12, which is more likely to dictate whether the Fed will raise interest rates by 25 basis points or 50 in early February. Economists expect the report to show inflation increased by 6.6% in the 12 months to December, so a weaker-than-consensus CPI could further boost markets’ performance.

Still, the impacts of a year-long bear market continue to play out as digital asset manager Osprey Funds reportedly laid off most of its staff during the second half of 2022. The investment company offers crypto products for its accredited investors’ brokerage accounts, including a trust.

Analysts should focus on Bitcoin derivatives to understand if the recent positive price action has finally turned crypto investors’ sentiment positive.

The futures premium shows sentiment is slowly improving

The two-month futures annualized premium should trade between +4% to +8% in healthy markets to cover costs and associated risks. Thus, when the futures trade below such a range, it shows a lack of confidence from leverage buyers — typically, a bearish indicator.

*Bitcoin 2-month futures annualized premium. Source: Laevitas.ch*

The above chart shows positive momentum for the Bitcoin futures premium, which recovered from a 3% discount on Dec. 30 to the current positive 1%. Although it is still in the neutral-to-bearish area, it represents less pessimism versus Dec. 13, before Bitcoin price pumped to $18,000. However, the demand for leverage longs at $17,000 is shy according to the metric.

Before jumping to conclusions, traders should also analyze Bitcoin’s options markets to exclude externalities specific to the futures instrument.

Options are pricing similar risks for upside and downside

The 25% delta skew is a telling sign when market makers and arbitrage desks are overcharging for upside or downside protection.

*Bitcoin 60-day options 25% delta skew: Source: Laevitas.ch*

The delta skew bottomed at 8% on Jan. 9, signaling that options traders are pricing similar risks for upside and downside. More importantly, the current level is the lowest since Nov. 8, or since the FTX exchange implosion.

Even if there’s no appetite for leverage longs using Bitcoin futures, the whales and market makers trading options are getting more comfortable with $17,000 becoming support.

Although there is no evidence that a pump to $18,250 is in the making, at least traders are less risk-averse, according to derivatives data.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

3 ways crypto derivatives could evolve and impact the market in 2023

Derivatives played a major role in the last bull market and it’s highly likely that they will be integral in the market’s evolution in 2023.

Futures and options let traders put down only a tiny portion of a trade’s value and bet that prices will go up or down to a certain point within a certain period. It can make traders’ profits bigger because they can borrow more money to add to their positions, but it can also boost their losses much if the market moves against them.

Even though the market for crypto derivatives is growing, the instruments and infrastructure that support it are not as developed as those in traditional financial markets.

Next year will be the year that crypto derivatives reach a new level of growth and market maturity because the infrastructure has been built and improved this year, and an increasing number of institutions are getting involved.

Crypto derivatives’ growth in 2023

In 2023, the volume of crypto derivatives will continue to grow because of two factors: first, the growth of relevant infrastructure such as applications for decentralized finance (DeFi) and also because of more professional and transparent intermediaries planning to enter the space. Eventually, this will lead to more institutions getting involved.

Understanding why traditional financial institutions use derivatives more than traditional spot markets is an excellent way to learn more about the market.

Some reasons for the growth are the ability to leverage capital, the fact that derivatives contracts in the U.S. are treated as long-term capital gains for tax purposes, and for their use in hedging, which is the ability to protect against unexpected price swings.

When more institutions get involved, relative volatility decreases, making trading derivatives a better use of capital. Also, as more institutions add crypto assets to their balance sheets, derivative instruments will become a critical tool for protecting against short-term volatility.

The industry is still in its early stages

Like 2022, 2023 is also bound to be a unique year for crypto derivatives. There’ll be a rise inboth centralized and decentralized options infrastructure and the continued development of new crypto primitives like structured vaults, everlasting options and experiments with derivatives.

The cryptocurrency industry is moving deeper into regulated markets as it tries to get more users and competes with existing traditional finance companies like brokerages that already let people trade stocks and other financial assets.

Most derivatives deals happen on Binance, OKX and Bybit, which are based outside of the U.S. and are not regulated. However, based on data from CoinGlass, CME Group is the only regulated U.S. market that has gained traction.

In November 2022, it was responsible for about 10.7% of the open interest in Bitcoin (BTC) and Ether (ETH) futures.

Big firms buying will continue buying small licensed derivatives operations

It’s getting harder to tell where retail markets end and institutional markets begin. The retail-focused businesses that crypto exchanges bought are run by some of Wall Street’s biggest and most experienced firms.

In January 2021, Coinbase bought FairX, a small futures exchange in Chicago. The goal of the deal was to make it easier for traders to get into derivatives markets. A retail-focused futures exchange startup called The Small Exchange also released a crypto futures product that requires less cash upfront. Citadel Securities, Jump and Interactive Brokers have all backed the company.

The growth of decentralized derivatives markets

Like centralized venues, perpetual futures comprise most of the volume of decentralized derivatives. First led by Perpetual Protocol and now by dYdX, the daily volume of decentralized perps averages $3 billion per day.

Even though growth has been robust, decentralized perpetual volume makes up less than 5% of all crypto derivatives volume. Over the next two years, we expect this segment to grow in a big way.

**Collect” below the illustration at the top of the page or follow this link.**

As more projects and protocols build on top of decentralized perpetual swap protocols, the value of the platforms that support them will continue to grow. Along with decentralized futures, options and structured products, market participants will be excited to see more crypto-native innovations like everlasting options developed.

Protocols like Deri, which offers both perpetual futures and everlasting options, let users trade derivatives in a very DeFi-native way, giving them the ability to hedge, speculate and arbitrage, all on-chain.

Derivatives could lure in more traditional investors

Institutional traders like these instruments more because they can provide stable returns, similar to fixed income, and these trades are executed with strategies like bull call spreads and covered calls. Also, institutional traders can combine call and put options to set a risk limit without risking liquidation for options trades.

Fidelity Digital Assets now offers their institutional client base the ability to borrow using crypto as collateral so that large companies can add Bitcoin to their assets more easily with the help of these services.

In 2023, it’s likely that crypto will be easier to use as collateral for everyday business, which will allow companies to take on more risk using cryptocurrency derivatives.

Derivatives played an instrumental role in the 2020-2021 crypto bull market for retail and institutional traders. For many investors, borrowing money and using derivatives is the easiest way to increase their bets on a variety of positions. They are available to use in stocks, currencies and commodities, but their use in cryptocurrencies has been steadily growing since 2017.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

3 reasons why Bitcoin is likely heading below $16,000

Reasons for bearishness include U.S. Federal Reserve tightening, the absence of leverage buyers’ demand, and fearful BTC options traders.

December will likely be remembered by Bitcoin’s (BTC) fake breakout above $18,000, but apart from that brief overshoot, its trajectory was entirely bearish. In fact, the downward trend that currently offers an $18,850 resistance could bring the BTC price below $16,000 by mid-January.

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

A handful of reasons can explain the negative movement, including the reported withdrawal of the Mazars Group auditing firm from the cryptocurrency sector on Dec. 16. The company previously handled proof-of-reserve audit services for Binance, KuCoin and Crypto.com.

Additionally, one can point to the bankruptcy of Core Scientific, one of the largest cryptocurrency miners in the United States, Core Scientific. The publicly listed company filed for Chapter 11 bankruptcy on Dec. 21 due to rising energy costs, increasing competition and the Bitcoin price crash in 2022.

The liquidity crisis at the crypto lender and trading desk Genesis Global and its parent company, Digital Currency Group (DCG), sparked fear among investors. More importantly, DCG manages the $10.5 billion Grayscale Bitcoin Investment Trust. The fund is currently trading at a 47% discount to its net asset value in part due to investor speculation on its exposure to Genesis Global.

Negative pressure from the U.S. Federal Reserve tightening movement

Apart from the bearish newsflow, the macroeconomic scenario deteriorated after the U.S. Federal Reserve hiked interest rates by 50 basis points on Dec. 14. Analysts, including Jim Bianco — head of institutional research firm Bianco Research — said that the monetary authority would maintain its tighter monetary policy in 2023.

Investors fear that Bitcoin could break below the current descending trend support at $16,100, triggering a sharp correction. Th3 Cryptologist, a veteran crypto trader, pointed out a descending wedge potentially causing a $14,000 low by February 2023.

On daily TF I can see this shaping out to be a descending wedge with a potential bottom forming at 14k area. $btc #bitcoin pic.twitter.com/dpPVZZy5Vk

— TH3 Cryptologist (@TH3Cryptologist) December 29, 2022

Looking at Bitcoin derivatives data may help one understand if the price action and recent news have impacted crypto investors’ sentiment.

Bitcoin buyers’ demand using leverage is yet to be seen

The three-month futures annualized premium should trade between +4% to +8% in healthy markets to cover costs and associated risks. Thus, when the futures trade at a discount versus regular spot markets, it shows a lack of confidence from leverage buyers — a bearish indicator.

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

The above chart shows that derivatives traders remain bearish as the Bitcoin futures premium stands negative. Even more concerning, not even the $18,000 pump on Dec. 14 was able to shift those whales and market makers to a balanced leverage demand between longs and shorts.

Still, the lack of demand for leverage buying does not necessarily indicate that traders expect an immediate adverse price action. For this reason, one should analyze Bitcoin’s options markets to exclude externalities specific to the futures instrument.

Options traders getting comfortable with downside risks

The 25% delta skew is a telling sign when market makers and arbitrage desks are overcharging for upside or downside protection.

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

The delta skew peaked at 23% on Dec. 29, signaling that options traders are uncomfortable with downside risks.

As the 30-day delta skew stands at 18%, both options and futures markets point to pro traders fearing that the $16,100 support will likely be tested.

Therefore, the reasons for investors’ bearishness include the continuation of higher interest rates, the absence of leverage buyers’ demand, and BTC option traders positioning for more downside.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Ethereum needs to defend $1,180 to sustain this 50-day ascending pattern

ETH price bulls struggle as futures remain trading below its fair value, signaling excessive demand for shorts.

Ether (ETH) has been ranging near $1,200 since Dec. 17, but an ascending trend has been quietly gaining strength after 50 consecutive days.

The pattern points to $1,330 or higher by March 2023, making it essential for bulls to defend the current $1,180 support.

*Ether/USD 1-day candle chart. Source: TradingView*

The anxiously awaited migration to a Proof of Stake in September 2022 paved the way for additional layer-2 integration and lower transaction costs overall. Layer-2 technologies such as Optimistic Rollups have the potential to improve Ethereum scalability by 100x and provide off-chain network storage.

Developers anticipate that the network upgrades scheduled for 2023 introducing large portable data bundles can boost the capacity of rollups by up to 100x. Moreover, in December 2021, Vitalik Buterin shared that the end game was for Ethereum to act as a base layer, with users “storing their assets in a ZK-rollup (zero knowledge) running a full Ethereum Virtual Machine.”

An unexpected move negatively affecting the competing smart chain platform Solana (SOL) has likely helped to fuel Ethereum investors’ expectations.

Two noticeable non-fungible token projects announced on Dec. 25 an opt-in migration to Ethereum and Polygon chains, namely eGods and y00ts. The transition will also bridge the DUST token — used to buy, sell and mint NFTs on the DeGods ecosystem — via Ethereum and Polygon.

Still, investors believe that Ether could revisit sub-$1,000 levels as the U.S. Federal Reserve continues to push interest rates higher and drain market liquidity. For example, trader and investor Crypto Tony expects the next couple of months to be extremely bearish to ETH:

$ETH / $USD – Update

I am 90% confident in another drop down to below $1,000 and remain in my short from the range high while below $1,280

Now the path we take to get to sub $1,000 can take a few approaches, including a pump first. So be prepared and use strict risk management pic.twitter.com/Rc1nVQG5Ql

— Crypto Tony (@CryptoTony__) December 29, 2022

Let’s look at Ether derivatives data to understand if the bearish macroeconomic scenario has impacted investors’ sentiment.

Excessive demand for bearish bets using ETH futures

The two-month futures annualized premium should trade between +4% to +8% in healthy markets to cover costs and associated risks. When the futures trade at a discount versus regular spot markets, it shows a lack of confidence from leverage buyers, which is a bearish indicator.

*Ether 2-month futures annualized premium. Source: Laevitas.ch*

The chart above shows that derivatives traders continue to demand more leverage for short (bear) positions as the Ether futures premium remains negative. Yet, the absence of leverage buyers’ appetite does not necessarily mean that a price drop is guaranteed.

For this reason, traders should analyze Ether’s options markets to understand whether investors are pricing higher odds of surprise adverse price movements.

Ethereum ptions traders remain risk-averse

The 25% delta skew is a telling sign when market makers and arbitrage desks are overcharging for upside or downside protection.

*Ether 60-day options 25% delta skew: Source: Laevitas.ch*

The delta skew peaked on Dec. 24, signaling moderate fear as the protective put options traded at a 22% premium. However, the movement gradually faded to the current 17% level, indicating options traders remain uncomfortable with downside risks.

The 60-day delta skew confirms that whales and market makers are not confident that the $1,180 support will hold.

In a nutshell, both options and futures markets suggest that investors are prepared for sub-$1,000 prices. As long as the U.S. Federal Reserve maintains its contractive economic policies, bears will likely successfully suppress future Ethereum price rallies.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Bitcoin rebound to $18.4K? BTC price derivatives show strength at key support zone

Miners are in deep trouble due to increased hash rate and energy costs, but pro traders slightly added to their longs despite the recent BTC pullback.

Bitcoin (BTC) price lost 11.3% between Dec. 14 and Dec. 18 after briefly testing the $18,300 resistance.

The move followed a seven-day correction of 8% in the S&P 500 futures after United States Federal Reserve Chair Jerome Powell issued hawkish statements after raising the interest rate on Dec. 14.

Bitcoin price retreats to channel support

Macroeconomic trends have been the main driver of recent movements. For instance, the latest bounce from the five-week-long ascending channel support at $16,400 has been attributed to the Central Bank of Japan’s efforts to contain inflation.

The Bank of Japan increased the limit on government bond yields on Dec. 20, which are now trading at levels unseen since 2015.

However, not everything has been positive for Bitcoin, as miners have struggled with the hash rate nearing an all-time high and increased energy costs. For example, on Dec. 20, Bitcoin miner Greenidge reached an agreement with its creditor to restructure $74 million worth of debt — although the deal requires the miner to sell nearly 50% of it equipment.

Moreover, publically listed Bitcoin mining company Core Scientific reportedly filed for Chapter 11 bankruptcy on Dec 21. While the company continues to generate positive cash flows, the income is insufficient to cover it operational costs, which involve repaying the lease for its Bitcoin mining equipment.

During these events, Bitcoin has held $16,800, so there are buyers at these levels. But let’s look at crypto derivatives data to understand whether investors have increased their risk appetite for Bitcoin.

Bitcoin futures are back to backwardation

Fixed-month futures contracts usually trade at a slight premium to regular spot markets because sellers demand more money to withhold settlement for longer. Technically known as contango, this situation is not exclusive to crypto assets.

In healthy markets, futures should trade at a 4% to 8% annualized premium, which is enough to compensate for the risks plus the cost of capital.

*Bitcoin 2-month futures annualized premium. Source: Laevitas*

It becomes clear that the attempts to push the indicator above zero have utterly failed over the past 30 days. The absence of a Bitcoin futures premium indicates higher demand for bearish bets, and the metric worsened from Dec. 14 to Dec. 21.

The current 1.5% discount indicates professional traders’ reluctance to add leveraged long (bull) positions despite being actually paid to do so.

Top traders unwilling to let go of their longs

Still, investors should analyze the long-to-short ratio to exclude externalities that have solely impacted the quarterly contracts’ premium.

The metric gathers data from exchange clients’ positions on spot and perpetual contracts, better informing how professional traders are positioned.

Even though Bitcoin briefly traded below $16,300 on Dec. 19, professional traders did not reduce their leverage long positions according to the long-to-short indicator. For instance, the Huobi traders’ ratio stabilized at 1.01 between Dec. 16 and Dec. 21.

Similarly, OKX displayed a modest increase in its long-to-short ratio, with the indicator moving from 1.02 to the current 1.04 in five days.

Lastly, the metric slightly increased from 1.05 to 1.07 at Binance, confirming that traders did not become bearish after the ascending channel support was tested.

Strength of $16,800 support is a bullish indicator

Traders cannot ascertain that the absence of a futures premium necessarily translates to bearish price expectations. For instance, the lack of confidence in the exchanges could have driven away potential leverage buyers.

Moreover, the resilience of the top traders’ long-to-short ratio has shown that whales and market makers did not reduce leverage longs despite the recent price dip.

In essence, Bitcoin’s price movement has been surprisingly positive, considering the negative news flow from miners and the bearish influence of raising interest rates on risk markets.

Therefore, as long as the $16,500 channel support continues to hold, bulls have reason to believe that another shot at the $18,400 upper band limit is viable before year-end.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.