Futures

Bitcoin’s bottom might be below $15.5K, but data shows some traders turning bullish

Bitcoin whales and market makers continue to add to their leverage long positions, even though it’s unclear whether $15,500 was the final bottom.

Bitcoin (BTC) bears have been in control since Nov. 11, subduing BTC price below $17,000 on every 12-hour candle. On Nov. 28, a drop to $16,000 shattered bulls’ hope that the 7% gains between Nov. 21 and Nov. 24 were enough to mark a cycle low at $15,500.

The most likely culprit was an unexpected transfer of 127,000 BTC from a Binance cold wallet on Nov. 28. The huge Bitcoin transaction immediately triggered fear, uncertainty and doubt, but the Binance CEO, Changpeng Zhao, subsequently announced it was part of an auditing process.

Regulatory pressure has also been limiting BTC’s upside after reports on Nov. 25 showed that cryptocurrency lending firm Genesis Global Capital and other crypto firms were under investigation by securities regulators in the United States. Joseph Borg, director of the Alabama Securities Commission, confirmed that its state and several other states are investigating Genesis’ alleged ties to securities laws violation.

On Nov. 16, Genesis announced it had temporarily suspended withdrawals, citing “unprecedented market turmoil.” Genesis also hired restructuring advisers to explore all possible options, including but not limited to a potential bankruptcy, as reported by Cointelegraph on Nov. 23.

Let’s look at derivatives metrics to better understand how professional traders are positioned in the current market conditions.

Margin markets show leverage longs at a 3-month high

Margin markets provide insight into how professional traders are positioned because it allows investors 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 increased from Nov. 20 to Nov. 27, signaling that professional traders increased their leverage longs during the 6% dip toward $15,500. Presently at 34, the metric favors stablecoin borrowing by a wide margin — the highest in three months — indicating traders have kept their bullish positions.

Leverage buyers ignored the recent dip to $15,500

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 failed to break above the $16,700 resistance, professional traders have kept their leverage long positions, according to the long-to-short indicator.

For instance, the ratio for Binance traders improved somewhat from 1.00 on Nov. 21, but ended the period at 1.05. Meanwhile, Huobi displayed a more substantial increase in its long-to-short ratio, with the indicator moving from 1.01 to 1.08 in the seven days until Nov. 28.

At crypto exchange OKX, the metric slightly decreased from 0.99 on Nov. 21 to 0.96 on Nov. 28. Consequently, on average, traders are confident enough to keep adding leverage to bullish positions.

The $16,200 support showed strength, suggesting that traders are turning bullish

These two derivatives metrics — margin and top trader’s long-to-short — suggest that size leverage sellers did not back the Bitcoin price correction to $16,000 on Nov. 28.

A bearish sentiment would have caused the margin lending ratio to go below 15, pushing the long-to-short ratio much lower. It is important to note that even pro traders can misinterpret the market, but the present reading from the derivatives market favors a strong $16,000 support.

Still, even if the price revisits $15,500, the bulls should not be concerned as the derivatives indicators withheld neutral-to-bullish on Nov. 21 and further improved during the week.

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.

Ethereum bears have the upper hand according to derivatives data, but for how long?

ETH bears continue to suppress Ethereum price, but institutional traders’ buying activity and exchanges’ aiming to provide more transparency could improve investor sentiment.

Ether (ETH) price experienced an 11.9% decline from Nov. 20 to Nov. 22, bottoming at $1,074 — the lowest level seen since July. Currently, investors have reason to be concerned after crypto lending company Genesis reportedly faced difficulties raising money, triggering rumors of insolvency on Nov. 21.

However, a spokesperson for Genesis told Cointelegraph that there were no plans for imminent bankruptcy because the company continues to hold discussions with its creditors.

Unease about the centralization of decentralized finance (DeFi) surfaced after Uniswap Labs changed the privacy policy on Nov. 17, revealing that it collects publicly-available blockchain data, users’ browser information, operating systems data and interactions with its service providers.

Adding to the fracas, the hacker behind the FTX exchange theft of $447 million has been spotted moving their Ether funds. On Nov. 20, the attacker transferred 50,000 ETH to a separate wallet and converted it to Bitcoin using two renBTC bridges.

Traders fear that the hacker might be suppressing Ether’s price to profit using leveraged short bets. The rumor was raised by kundunsan on Nov. 15, even though the Twitter post did not gain exposure.

Unpopular opinion:
SBF is the hacker and already shorted market heavy and collecting all stolen assets into $ETH
Finally he’ll dump huge ETH bag to more profit his short positions.
He’s still rubbing us, unbelievable. https://t.co/CYJmOSgwXO

— Dervish (@kundunsan) November 15, 2022

Let’s look at Ether derivatives data to understand if the worsening market conditions have impacted crypto investors’ sentiment.

Pro traders have been in panic mode since Nov. 10

Retail traders usually avoid quarterly futures due to their price difference from spot markets, but they are professional traders’ preferred instruments because they prevent the fluctuation of funding rates that often occurs in a perpetual futures contract.

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

The three-month futures annualized premium should trade between +4% to +8% in healthy markets to cover costs and associated risks. The chart above shows that derivatives traders have been bearish since Nov. 10, when the Ether futures premium was negative.

Currently, there is backwardation in the contracts and this situation is atypical and usually deemed bearish. The metric did not improve after ETH rallied 5% on Nov. 22, reflecting professional traders’ unwillingness to add leveraged long (bull) positions.

Traders should also analyze Ether’s options markets to exclude externalities specific to the futures instrument.

Options traders fear additional crashes

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.ch*

The delta skew has been above the 10% threshold since Nov. 9, signaling that options traders were less inclined to offer downside protection. The situation worsened over the following days as the delta skew indicator surged above 20%.

The 60-day delta skew currently stands at 23%, so whales and market makers are pricing higher odds of price dumps for Ether. Consequently, derivatives data shows low confidence right as Ether struggles to hold the $1,100 support.

According to the data, Ether bulls should not throw in the towel just yet because these metrics tend to be backward-looking. The panic that followed FTX’s bankruptcy and the subsequent liquidity issues at Genesis might dissipate quickly if the exchange’s public proof of reserves and institutional investors adding Bitcoin (BTC) exposure during the dip are interpreted as positives by market participants.

With that said, at the moment Ether bears still have the upper hand according to ETH 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.

Data shows traders are slightly bullish even as crypto’s total market cap falls under $800B

The total crypto market cap has dropped under $800 billion, but data highlights a few reasons why some traders are bullish.

The total cryptocurrency market capitalization dropped by 5% between Nov. 14 and Nov. 21, reaching a notable $795 billion. However, the overall sentiment is far worse, considering that this valuation is the lowest seen since December 2020.

*Total crypto market cap in USD, 4-hour. Source: TradingView*

The price of Bitcoin (BTC) dipped a mere 2.8% on the week, but investors have little to celebrate because the current $16,100 level represents a 66% drop year-to-date. Even if the FTX and Alameda Research collapse has been priced in, investor uncertainty is now focused on the Grayscale funds, including the $10.5 billion Grayscale Bitcoin Trust.

Genesis Trading, part of the Digital Currency Group (DCG) conglomerate, halted withdrawals on Nov. 16. In its latest quarterly report, the crypto derivatives and lending trading firm stated that it has $2.8 billion worth of active loans. The fund administrator, Grayscale, is a subsidiary of DCG, and Genesis acted as a liquidity provider.

The 5% weekly drop in total market capitalization was mostly impacted by Ether’s (ETH) 8.5% negative price move. Still, the bearish sentiment had a larger effect on altcoins, with nine of the top 80 coins losing 12% or more in the period.

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

Litecoin (LTC) gained 5.6% after dormant addresses in the network for one year surpassed 60 million coins.

Near Protocol’s NEAR (NEAR) dropped 23% due to concerns about the 17 million tokens held by FTX and Alameda, which backed Near Foundation in March 2022.

Decentraland’s MANA (MANA) lost 15% and Ethereum Classic (ETC) another 13.5% as both projects had considerable investments from Digital Currency Group, controller of the troubled Genesis Trading.

Balanced leverage demand between bulls and bears

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.

*Perpetual futures accumulated 7-day funding rate on Nov. 21. Source: Coinglass*

The seven-day funding rate was slightly negative for Bitcoin, so the data points to excessive demand for shorts (sellers). Still, a 0.20% weekly cost to maintain bearish positions is not worrisome. Moreover, the remaining altcoins — apart from Solana’s SOL (SOL) — presented mixed numbers, indicating a balanced demand between longs (buyers) and shorts.

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

The options put/call ratio shows moderate bullishness

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 lags the more bullish calls by 30% and is therefore bullish. In contrast, a 1.20 indicator favors put options by 20%, which can be deemed bearish.

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

Even though Bitcoin’s price broke below $16,000 on Nov. 20, investors did not rush for downside protection using options. As a result, the put-to-call ratio remained steady near 0.54. Furthermore, the Bitcoin options market remains more strongly populated by neutral-to-bearish strategies, as the current level favoring buy options (calls) indicates.

Derivatives data shows investors’ resilience considering the absence of excessive demand for bearish bets according to the futures funding rate and the neutral-to-bullish options open interest. Consequently, the odds are favorable for those betting that the $800 billion market capitalization support will display strength.

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 traders increase leverage longs even as crypto critics say BTC is a ‘pure Ponzi’

In the past 48 hours Bitcoin traders added to their leveraged long positions even as crypto critics and politicians ramp up their criticism of cryptocurrencies.

Bitcoin (BTC) price has tested the $16,000 resistance multiple times since the 25% crash that occurred between Nov. 7 and Nov. 9, and some critics will justify their bearish bias by incorrectly assuming that the failure of FTX exchange should trigger a much broader correction.

It’s kind of annoying me that Bitcoin is still selling for $16k-ish, even in the wake of all of this FTX news. I mean I assume the volume is low, but what on earth will it take to properly crush this zombie “currency” back to its rightful value of nearly zero?

— Daniel Knowles (@dlknowles) November 18, 2022

For example, Daniel Knowles, a correspondent at The Economist, says the 26th largest tradable asset in the world with a $322 billion market capitalization is “astonishingly useless and wasteful.” Knowles also said that “there is still no logical case for specifically Bitcoin. It’s pure ponzi.”

If you think it through, for outsiders, Bitcoin’s price is the single most important indicator of success, regardless of its valuation surpassing secular companies such as Nestle (NESN.SW), Bank of America (BAC) and Coca-Cola (KO).

Most people’s need for centralized authority over their money is so entrenched that cryptocurrency exchanges’ success and failure rate becomes the gatekeeper and success benchmark, when in fact, quite the opposite is true. Bitcoin was created as a peer-to-peer monetary transmission network, so exchanges are not synonyms for adoption.

It is worth highlighting that Bitcoin has been trying to break above $17,000 for the past seven days, so there is certainly a lack of appetite from buyers above that level. The most likely reason is that investors fear contagion risks, similar to what was seen with Genesis Block, the last FTX-related victim to halt service due to liquidity concerns. According to recent reports, the company announced plans to cease trading and shutter operations.

Bitcoin price is stuck in a downtrend, and it will be hard to shake it, but it’s a fallacy to assume that centralized cryptocurrency exchange failure is the primary reason for Bitcoin’s downtrend or a reflection of its actual value.

Let’s look at crypto derivatives data to understand whether investors remain risk-averse to Bitcoin.

Futures markets are in backwardation and this is bearish

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.ch*

Considering the data above, it is evident that derivatives traders flipped bearish on Nov. 9, as the Bitcoin futures premium entered backwardation, meaning the demand for shorts — bearish bets — is extremely high. This data reflects professional traders’ unwillingness to add leveraged long (bull) positions despite the inverted cost.

The longs-to-shorts ratio shows a more balanced situation

To exclude externalities that might have solely impacted the quarterly contracts, traders should analyze the top traders’ long-to-short ratio. It gathers data from exchange clients’ positions on the spot, perpetual and fixed-calendar futures contracts, thus better informing on how professional traders are positioned.

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

Even though Bitcoin failed to break the $17,000 resistance on Nov. 18, professional traders slightly increased their leverage long positions according to the long-to-short indicator. For instance, the Huobi traders’ ratio improved from 0.93 on Nov. 16 and presently stands at 0.99.

Similarly, OKX displayed a modest increase in its long-to-short ratio, as the indicator moved from 1.00 to the current 1.04 in two days. Lastly, the metric stood flat near 1.00 at the Binance exchange. Thus, such data show traders did not become bearish after the latest resistance rejection.

Consequently, one should not conclude that the futures backwardation considering the broader analysis of the long-to-short ratio, show no evidence of excessive bearish demand from whales and market makers.

It will likely take some time until investors exclude the potential regulatory and contagion risks caused by FTX and Alameda Research’s downfall. Until then, a sharp recovery for Bitcoin seems unlikely for the short term.

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

CME Bitcoin futures trade at a discount, but is that a good or a bad thing?

CME Bitcoin futures briefly traded at a 5% discount, alarming analysts, but what does it mean for BTC price?

CME Group’s Bitcoin (BTC) futures have been trading below Bitcoin’s spot price on regular exchanges since Nov. 9, a situation that is technically referred to as backwardation. While it does point to a bearish market structure, there are multiple factors that can cause momentary distortions.

Typically, these CME fixed-month contracts trade at a slight premium, indicating that sellers are requesting more money to withhold settlement for longer. As a result, futures should trade at a 0.5%-to-2% premium in healthy markets, a situation known as contango.

However, a prominent futures contract seller will cause a momentary distortion in the futures premium. Unlike perpetual contracts, these fixed-calendar futures do not have a funding rate, so their price may vastly differ from spot exchanges.

Aggressive sellers caused a 5% discount on BTC futures

Whenever there’s aggressive activity from shorts (sellers), the two-month futures contract will trade at a 2% or higher discount.

*CME Bitcoin 1-month futures premium vs. BTC index. Source: TradingView*

Notice how one-month CME futures had been trading near the fair value, either presenting a 0.5% discount or 0.5% premium versus spot exchanges. However, during the Nov. 9 Bitcoin price crash, aggressive futures contracts sellers caused the CME futures to trade 5% below the regular market price.

The present 1.5% discount remains atypical, but it can be explained by the contagion risks caused by the FTX and Alameda Research bankruptcy. The organizations were together supposedly one of the largest market makers in cryptocurrencies, so their downfall was bound to send shockwaves throughout all crypto-related markets.

The insolvency has severely impacted prominent over-the-counter desks, investment funds and lending services, including Genesis, BlockFi and Galois Capital. As a result, traders should expect less arbitrage activity between CME futures and the remaining spot market exchanges.

The lack of market makers exacerbated the negative impact

As market makers scramble to reduce their exposure and assess counterparty risks, the eventual excessive demand for longs and shorts at CME will naturally cause distortions in the futures premium indicator.

The backwardation in contracts is the primary indicator of a dysfunctional and bearish derivatives market. Such a movement can occur during liquidation orders or when large players decide to short the market using derivatives. This is especially true when open interest increases because new positions are being created under these unusual circumstances.

On the other hand, an excessive discount will create an arbitrage opportunity because one can buy the futures contract while simultaneously selling the same amount on spot (or margin) markets. This is a neutral market strategy, commonly known as “reverse cash and carry.”

Institutional investors’ interest in CME futures remains steady

Curiously, the open interest in CME Bitcoin futures reached its highest level in four months on Nov. 10. This data measures the aggregate size of buyers and sellers using CME’s derivatives contracts.

*CME Bitcoin futures open interest, USD. Source: Coinglass*

Notice that the $5.45 billion record high happened on Oct. 26, 2021, but Bitcoin’s price was near $60,000 then. Consequently, the $1.67 billion CME futures open interest on Nov. 10, 2022, remains relevant in the number of contracts.

Traders often use open interest as an indicator to confirm trends or, at least, institutional investors’ appetite. For instance, a rising number of outstanding futures contracts is usually interpreted as new money coming into the market, irrespective of the bias.

Although this data can’t be deemed bullish on a standalone basis, it does signal that professional investors’ interest in Bitcoin is not going away.

As further proof, notice that the open interest chart above shows that savvy investors did not reduce their positions using Bitcoin derivatives, regardless of what critics have said about cryptocurrencies.

Considering the uncertainty surrounding cryptocurrency markets, traders shouldn’t assume that a 1.5% discount on CME futures denotes long-term bearishness.

There’s undoubtedly a demand for shorts, but the lack of appetite from market makers is the primary factor leading to the current distortion.

Total crypto market cap drops to $850B as data suggests further downside

The crypto market managed an 11% bounce from the Nov. 9 low, but a handful of metrics show a severe lack of investor confidence.

The total cryptocurrency market capitalization dropped by 24% between Nov. 8 and Nov. 10, reaching a $770 billion low. However, after the initial panic was subdued and forced future contracts liquidations were no longer pressuring asset prices, a sharp 16% recovery followed.

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

This week’s dip was not the market’s first rodeo below the $850 billion market capitalization level, and a similar pattern emerged in June and July. In both cases, the support displayed strength, but the $770 billion intraday bottom on Nov. 9 was the lowest since December 2020.

The 17.6% weekly drop in total market capitalization was mostly impacted by Bitcoin’s (BTC) 18.3% loss and Ether’s (ETH) 22.6% negative price move. Still, the price impact was more severe on altcoins, with 8 of the top 80 coins losing 30% or more in the period.

FTX Token (FTT) and Solana (SOL) were severely impacted by liquidations following the insolvency of FTX exchange and Alameda Research.

Aptos (APT) dropped 33% despite denying rumors that Aptos Labs or Aptos Foundation treasuries were held by FTX.

Stablecoin demand remained neutral in Asia

The USD Coin (USDC) 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, the stablecoin’s market offer is flooded, causing a 4% or higher discount.

*USDC peer-to-peer vs. USD/CNY. Source: OKX*

Currently, the USDC premium stands at 100.8%, flat versus the previous week. Therefore, despite the 24% drop in total cryptocurrency market capitalization, no panic selling came from Asian retail investors.

However, this data should not be considered bullish, as the USDC buying pressure indicates traders seek shelter in stablecoins.

Few leverage buyers are using futures markets

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.

*Perpetual futures 7-day funding rate on Nov. 11. Source: Coinglass*

As depicted above, the 7-day funding rate is slightly negative for the two largest cryptocurrencies and the data points to an excessive demand for shorts (sellers). Even though there is a 0.40% weekly cost to maintain open positions, it is not worrisome.

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

The options put/call ratio points to worsening sentiment

Traders can gauge the overall sentiment of the market 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 1.20 indicator favors put options by 20%, which can be deemed bearish.

*BTC options put-to-call ratio. Source: Cryptorank.io*

As Bitcoin price broke below $18,500 on Nov. 8, investors rushed to seek downside protection. As a result, the put-to-call ratio subsequently increased to 0.65. Still, the Bitcoin options market remains more strongly populated by neutral-to-bearish strategies, as the current 0.63 level indicates.

Combining the absence of stablecoin demand in Asia and negatively skewed perpetual contract premiums, it becomes evident that traders are not comfortable that the $850 billion market capitalization support will hold in the near term.

The market is hot, but Solana is not — Data explains why SOL price is lagging

SOL price has been in a three-month downtrend, but recent newsflow and events could trigger a reversal.

Solana (SOL) has been in a steady downtrend for the past three months, but some traders believe that it may have bottomed at $26.80 on Oct. 21. Lately, there h been a lot of speculation on the causes for the underperformance and some analysts are pointing to competition from Aptos Network.

*Solana price at FTX, USD. Source: TradingView*

The Aptos blockchain launched on Oct. 17 and it claims to handle three times more transactions per second than Solana. Yet, after four years of development and millions of dollars in funding, the debut of the layer-1 smart contract solution was rather unimpressive.

It is essential to highlight that Solana presently holds an $11.5 billion market capitalization at the $32 nominal price level, ranking it as the seventh largest cryptocurrency when excluding stablecoins. Despite its size, SOL’s year-to-date performance reflects a lackluster 82% drop, while the broader global market capitalization is down 56%.

Unfortunate events have negatively impacted SOL’s price

The downtrend accelerated on Oct. 11 after a leading decentralized finance application on the Solana Network suffered a $116 million hack.

Mango Markets’ oracle was attacked due to the low liquidity on the platform’s native Mango (MNGO) token which is used for collateral. To put things in perspective, the hack represented 9% of Solana’s total value locked (TVL) in smart contracts.

Other negative news emerged on Nov. 2 as German data center operator and cloud provider Hetzner started blocking crypto-related activity. The company’s terms of service prohibit customers from running nodes, mining and farming, plotting and storing blockchain data. Still, Solana nodes have other cloud storage providers to choose from, and Lido Finance confirmed that the risk for their validators had been mitigated.

A potentially promising partnership was announced on Nov. 2 after Instagram integrated support for Solana-based nonfungible tokens (NFTs), allowing users to create, sell and showcase their favorite digital arts and collectibles. SOL immediately reacted with a 5.7% pump in 15 minutes but retraced the entire movement over the next hour.

To get a more granular view of what is going on with SOL price, traders can also analyze Solana’s futures markets to understand whether the bearish newsflow has affected professional traders’ sentiment.

Derivatives metrics show an unusual degree of apathy

Whenever there is relevant growth in the number of derivatives contracts currently in play, it usually means more traders are involved. In futures markets, longs and shorts are balanced at all times, but having a larger number of active contracts — open interest — allows the participation of institutional investors who require a minimum market size.

*Solana futures open interest, USD. Source: Coinglass*

In the past 30 days, the total open interest on Solana has been reasonably steady at $440 million. As a comparison, Polygon (MATIC) aggregated futures position soared to $415 million from $153 million on Oct. 3.

BNB Chain’s token, BNB (BNB), displayed a similar trend reaching $485 million, up from $296 million on Oct. 3.

With that said, open interest doesn’t necessarily mean that professional investors are bullish or bearish. The futures annualized premium measures the difference between longer-term futures contracts and the current spot market levels.

The futures premium (basis rate) indicator should run between 4% to 8% to compensate traders for “locking in” the money until the contract expiry. Thus, levels below 2% are bearish, while numbers above 10% indicate excessive optimism.

*Solana annualized 3-month futures premium. Source: Laevitas.ch*

Data from Laevitas shows that Solana’s futures have been trading in backwardation for the past 30 days, meaning the futures’ contract price is lower than regular spot exchanges.

Ether (ETH) futures are trading at a 0.5% annualized basis, while Bitcoin’s (BTC) stands at 2%. The data is somewhat concerning for Solana since it signals a lack of interest from leverage buyers.

Rumors about Alameda Research could create more pressure

It is hard to pinpoint the reason for so much apathy about Solana and even the complete dominance of leverage short demand. Even more curious is Alameda Research’s influence on Solana projects. Alameda is the digital asset trading company spearheaded by Sam Bankman-Fried.

Recently, trader and Crypto Twitter influencer Hsaka raised concerns about whether the firm has been suppressing SOLs price even after bullish catalysts emerged.

Entire market catching a bid meanwhile Sol aimlessly meandering after two hyper bullish catalysts in such an environment.

Alameda washed up. https://t.co/FuGQvMfRcF

— Hsaka (@HsakaTrades) November 4, 2022

It’s probably highly unlikely that market participants will really find out Alameda Research’s impact on SOL price. Still, the theory raised by Hsaka could explain the rather unusual steady demand for leverage shorts and the negative basis rate. The arbitrage and market-making firm could have used derivatives instruments to reduce their exposure without selling SOL on the open market.

There are no signs that short sellers using SOL futures instruments are nearing liquidation or exhaustion, so their upper hand remains until the broader cryptocurrency market shows signs of strengthening.

Bitcoin’s $20K support looks weak, but pro traders are neutrally positioned

New data shows how pro traders are positioned as BTC price continues to encounter resistance at $21,000.

Bitcoin (BTC) has been lingering above $20,000 for the past nine days, but worsening conditions from traditional markets are causing traders to doubt if the support will hold.

On Nov. 3, the Bank of England raised interest rates by 75 basis points to 3%, its largest single hike since 1989. The risks of a prolonged recession also increased as the Monetary Policy Committee struggled to contain inflationary pressure.

The U.K. monetary authority noted that its most recent growth and inflation projections present a “very challenging” outlook for the economy. The statement from the committee added that “high energy prices and tighter financial conditions weigh on spending,” thus negatively pressuring the employment data.

The U.S. Federal Reserve also hiked interest rates on Nov. 2, the fourth consecutive raise, which brings rates to the highest levels since January 2008. The confirmation of a conservative approach from central banks can partially explain why Bitcoin failed to break the $21,000 resistance on Oct. 29 and has since declined by 4.5%.

Let’s take a look at derivatives metrics to better understand how professional traders are positioned in the current market conditions.

Options traders are not particularly bullish

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

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

The delta skew had been above the 10% threshold until Oct. 26, signaling that options traders were less inclined to offer downside protection. A more balanced situation emerged, but the $21,000 resistance test on Oct. 29 was not enough to instill confidence in option traders.

Currently, the 60-day delta skew stands at 6%, so whales and market makers are pricing similar odds of rallies and price dumps. However, other data is showing low confidence as BTC approaches the $20,000 support.

Leverage buyers ignored the recent rally

The long-to-short metric excludes externalities that might have solely impacted the options markets. It also 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 Ether long-to-short ratio. Source: Coinglass*

Even though Bitcoin rallied 9% from Oct. 22 to Oct. 29, professional traders slightly reduced their leverage long positions, according to the long-to-short indicator.

For instance, the ratio for Binance traders improved somewhat from the 1.25 start, but then finished the period below its starting level at 1.22. Meanwhile, Huobi displayed a modest decrease in its long-to-short ratio, with the indicator moving from 1.03 to 1.00 in the seven days until Oct. 29.

At crypto exchange OKX, the metric slightly decreased from 1.01 on Oct. 22 to 0.94 on Oct. 29. This means that on average, traders were not confident enough to add leverage to bullish positions.

The $20,000 support is weak, but traders are not bearish

These two derivatives metrics — options skew and long-to-short — suggest that the 4.5% Bitcoin price correction since the $21,000 test on Oct. 29 was backed by a moderate level of distrust from leverage buyers.

A more optimistic sentiment would have caused the 60-day delta skew to enter the negative range and possibly have pushed the long-to-short ratio to higher levels. It is important to note that even pro traders can misinterpret the market, but the present reading from the derivatives market favors a weak $20,000 support.

From an optimistic perspective, there is no indication that pro traders expect a negative move. Basically, nothing changes even if the price revisits the $19,000 range because 50 days have passed since Bitcoin last traded above $22,000.

3 major mistakes to avoid when trading crypto futures and options

Leverage and hedging strategies are powerful ways to use derivatives contracts, but traders usually succumb to these three major mistakes.

Novice traders are usually drawn to futures and options markets due to the promise of high returns. These traders watch influencers post incredible gains, and at the same time, the multiple advertisements from derivatives exchanges that offer 100x leverage are at times irresistible for most.

Although traders can effectively increase gains with recurring derivatives contracts, a few mistakes can quickly turn the dream of outsized gains into nightmares and an empty account. Even experienced investors in traditional markets fall victim to issues particular t cryptocurrency markets.

Cryptocurrency derivatives function similarly to traditional markets because buyers and sellers enter into contracts dependent on an underlying asset. The contract cannot be transferred across different exchanges, nor can it be withdrawn.

Most exchanges offer options contracts priced in Bitcoin (BTC) and Ether (ETH), so the gains or losses will vary according to the asset’s price fluctuations. Options contracts also offer the right to acquire and sell at a later date for a predetermined price. This gives traders the ability to build leverage and hedging strategies.

Let’s investigate three common errors to avoid when trading futures and options.

Convexity can kill your account

The first issue traders face when trading cryptocurrency derivatives is called convexity. In this situation, the margin deposit changes its value as the underlying asset’s price oscillates. As Bitcoin’s price increases, the investor’s margin rises in U.S. dollar terms, allowing additional leverage.

The issue emerges when the opposite movement occurs and BTC price collapses; consequently, the users’ deposited margin decreases in U.S. dollar terms. Traders often get too excited when trading futures contracts, and positive headwinds reduce their leverage as BTC price increases.

The main takeaway is that traders should not increase positions solely due to the delivery caused by the increasing value of margin deposits.

Isolated margin has benefits and risks

Derivatives exchanges require users to transfer funds from their regular spot wallets to futures markets, and some will offer an isolated margin for perpetual and monthly contracts. Traders have the option to select between cross collateral, meaning the same deposit serves multiple positions or is isolated.

There are benefits for each option, but novice traders tend to get confused and are liquidated due to failing to administer the margin deposits correctly. On the other hand, isolated margin offers more flexibility to support risk, but it requires additional maneuvers to prevent excessive liquidations.

To solve such an issue, one should always use cross margin and manually enter the stop loss on every trade.

Beware, not every options market has liquidity

Another common mistake involves trading illiquid options markets. Trading illiquid options drives up the cost of opening and closing positions, and options already have embedded expenses due to crypto’s high volatility.

Options traders should ensure the open interest is at least 50x the number of contacts desired to trade. Open interest represents the number of outstanding contracts with a strike price and expiration date that have been previously bought or sold.

Understanding implied volatility can also help traders make better decisions about the current price of an options contract and how they might change in the future. Keep in mind that an option’s premium increases alongside higher implied volatility.

The best strategy is to avoid buying calls and puts with excessive volatility.

It takes time to master derivatives trading, so traders should start small and test each function and market ahead of placing large bets.

Ethereum price hits $1.6K as markets expect the Fed to ease the pressure

ETH price rose to its highest level since September, but data shows whales lack an appetite for leverage longs.

A $250 surprise rally took place between Oct. 25 and Oct. 26, pushing the price of Ether (ETH) from $1,345 to $1,595. The movement caused $570 million in liquidations in Ether’s bearish bets at derivatives exchanges, which was the largest event in more than 12 months. Ether’s price also rallied above the $1,600 level, which was the highest price seen since Sept. 15.

Let’s explore whether this 27% rally over the past 10 days reflects any signs of a trend change.

*Ether/USD 4-hour price index. Source: TradingView*

It is worth highlighting that another 10.3% rally toward $1,650 happened three days later on Oct. 29, and this triggered another $270 million of short seller liquidations on ETH futures contracts. In total, $840 million worth of leveraged shorts was liquidated in three days, representing over 9% of the total ETH futures open interest.

On Oct. 21, the market became optimistic after San Francisco Federal Reserve President Mary Daly mentioned intentions to step down the pace of interest rate hikes. However, the United States central bank’s previous tightening movement has led the S&P 500 stock market index to a 19% contraction in 2022.

Despite the 5.5% stock market rally between Oct. 20 and Oct. 31, analysts at ING noted on Oct. 28 that “we do indeed expect the Fed to open the door to a slower pace through formal forward guidance, but it may not necessarily go through it.” Furthermore, the ING report added, “It could be that we get a final 50bp in February that would then mark the top. This would leave a terminal rate of 4.75% to 5%.”

Considering the conflicting signals from traditional markets, let’s look at Ether’s derivatives data to understand whether investors have been supporting the recent price rally.

Futures traders kept a bearish stance despite the $1,600 rally

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 fluctuation of funding rates that often occurs in a perpetual futures contract.

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

The indicator should trade at a 4% to 8% annualized premium in healthy markets to cover costs and associated risks. Hence, the above chart clearly shows a prevalence of bearish bets on ETH futures, as its premium stood in the negative area in October. Such a situation is unusual and typical of bearish markets, reflecting professional traders’ unwillingness to add leveraged long (bull) positions.

Traders should also analyze Ether’s options markets to exclude externalities specific to the futures instrument.

ETH options traders moved to a neutral positioning

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

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

The 60-day delta skew had been above the 10% threshold until Oct. 25, and signaling options traders were less inclined to offer downside protection. However, a significant change happened over the following days as whales and arbitrage desks started to price a balanced risk for downward and upward price swings.

Liquidations show a surprise move, but minimal confidence from buyers

These two derivatives metrics suggest that Ether’s 27% price rally from Oct. 21 to Oct. 31 was not expected, which explains the huge impact on liquidations. In comparison, a 25% Ether rally from Aug. 4 to Aug. 14 caused $480 million worth of leveraged short (sellers) liquidations, roughly 40% lower.

Currently, the prevailing sentiment is neutral according to ETH options and futures markets. Therefore, traders are likely to tread carefully, especially when whales and arbitrage desks have stood on the sidelines during such an impressive rally.

Until there is confirmation of the $1,500 support level’s strength and pro traders’ increased appetite for leverage longs, investors should not rush to the conclusion that the Ether rally is sustainable.