Futures

Bitcoin fails to break the $21K support, but bears remain shy

BTC futures and stablecoin margin data shows a lack of appetite from buyers even as Bitcoin gained 7.5% in a week.

Bitcoin (BTC) rallied on the back of the United States stock market’s 3.4% gains on Oct. 28, with the S&P 500 index rising to its highest level in 44 days. In addition, recently released data showed that inflation might be slowing down, which gave investors hope that the Federal Reserve might break its pattern of 75 basis-point rate hikes after its November meeting.

In September, the U.S. core personal consumption expenditures price index rose 0.5% from the previous month. Although still an increase, it was in line with expectations. This data is the Federal Reserve’s primary inflation measure for interest rate modeling.

Additional positive news came from tech giant Apple, which reported weak iPhone revenues on Oct. 27 but beat Wall Street estimates for quarterly earnings and margin. Moreover, Apple chief financial officer Luca Maestri said services would grow year-over-year in the fourth quarter.

Bitcoin futures data shows reluctant buyers

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

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

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

Bitcoin’s futures premium has stood below 2% for the past 30 days, signaling a complete lack of interest from leverage buyers. Furthermore, there was no significant improvement on Oct. 29 as BTC rallied toward the $21,000 resistance.

In a nutshell, derivatives traders are far from optimistic about Bitcoin’s price despite the low cost of adding bullish positions. Still, one must also analyze the BTC margin markets to exclude externalities specific to the futures instrument.

Derivative traders are unwilling to place bullish bets

Margin trading allows investors to borrow cryptocurrency to leverage their trading position, potentially increasing their returns. For example, one can buy Bitcoin by borrowing Tether (USDT), thus increasing their crypto exposure. On the other hand, borrowing Bitcoin can only be used to short it — betting on the price decrease.

Unlike futures contracts, the balance between margin longs and shorts isn’t necessarily matched. When the margin lending ratio is high, it indicates that the market is bullish — the opposite, a low lending ratio, signals that the market is bearish.

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

The chart above shows that investors’ morale topped on Oct. 13 as the ratio reached 23.5, which is seldom sustainable for longer-term periods. From that point onward, OKX traders presented less demand for borrowing Tether, exclusively used to bet on the price uptrend.

Still, the ratio currently stands at 7.5, leaning bullish in absolute terms, as it favors stablecoin borrowing by a wide margin. It is worth highlighting that no sentiment change happened despite Bitcoin’s 7.5% weekly rally between Oct. 24 and Oct. 31.

A lack of excitement does not mean bearishness

Derivatives data shows no demand from buyers even as Bitcoin flirted with $21,000 on Oct. 29. Unlike retail traders, these experienced whales tend to anticipate movements by holding on to their conviction even when markets move the opposite way.

The above data suggests that traders expecting Bitcoin to break above $21,000 in the short term will likely be disappointed. However, on a positive note, there has been no sign of bears getting more confident, as both futures and margin markets remain neutral to bullish.

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

Bitcoin traders were ready for a hot CPI report, but BTC bears are still in control

BTC nose-dived to its lowest level since Sept. 21, and data shows pro traders continue to avoid leverage longs.

Cryptocurrency traders were caught by surprise after the Oct. 13 Consumer Price Index Report showed inflation in the United States rising by 0.6% in September versus the previous month. The slightly higher-than-expected number caused Bitcoin (BTC) to face a 4.4% price correction from $19,000 to $18,175 in less than three hours.

The abrupt movement caused $55 million in Bitcoin futures liquidations at derivatives exchanges, the largest amount in three weeks. The $18,200 level was the lowest since Sept. 21 and marks an 8.3% weekly correction.

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

It is worth highlighting that the dip under $18,600 on Sept. 21 lasted less than 5 hours. Bears were likely disappointed as a 6.3% rally took place on Sept. 22, causing Bitcoin to test the $19,500 resistance. A similar trend is happening on Oct. 13 as BTC currently trades near $19,000.

The stock market also reacted negatively as the tech-heavy Nasdaq Composite Index moved down 3% after the inflation data was released. After the initial panic selling, Nasdaq adjusted to a 2% daily loss as analysts reaffirmed their expectations toward a 0.75% interest rate increase by the U.S. Federal Reserve Committee in November.

Investors became even more bearish after BlackRock Inc (BLK) reported a 16% drop in profit versus the previous year. Meanwhile, financial heavyweights JPMorgan Chase (JPM) and Morgan Stanley (MS) are set to report on Oct. .

Contrary to U.S. President Joe Biden’s appeal, Saudi Arabia’s Ministry of Foreign Affairs put out a rare statement on Oct. 13 defending the Organization of the Petroleum Exporting Countries’ production cut. The White House wanted to delay the decision until after the midterms. Nevertheless, the oil producer group decided to decrease the supply target by 2 million barrels per day beginning in November.

All of these developments are increasing investors’ bearish emotions. ao get a better gauge on what is happening in the crypto sector, traders should look at derivatives data to see if investors were taken by surprise after the 4.4% dip below $18,200.

Futures markets were bearish for the past month

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

*Bitcoin 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. Derivatives traders had been neutral to bearish for the past month because the Bitcoin futures premium remained below 1% the entire time.

This data reflects professional traders’ unwillingness to add leveraged long (bull) positions despite the low cost. However, one must also analyze the Bitcoin options markets to exclude externalities specific to the futures instrument.

Option traders are unwilling to offer downside protection

The 25% delta skew is a telling sign when market makers and arbitrage desks are overcharging for upside or downside protection. For example, in bear markets, options investors give higher odds for a price dump, causing the skew indicator to rise above 12%. On the other hand, bullish markets tend to drive the skew indicator below negative 12%, meaning the bearish put options are discounted.

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

The 30-day delta skew had been above the 12% threshold since Oct. 10, signaling that options traders were less inclined to offer downside protection. These two derivatives metrics suggest that the Bitcoin price dump on Oct. 13 might have been partially expected, which explains the relatively low impact on liquidations.

More importantly, the prevailing bearish sentiment remained after the CPI inflation was announced. Consequently, whales and markers are less inclined to add leverage longs or offer downside protection. Considering the weak macroeconomic conditions and global political tension, the odds currently favor the bears.

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.

Ethereum open interest hits $7.7B, raising the chance of a short squeeze above $1.5K

The Ether futures premium remains negative, while options markets are pricing similar risks for bulls and bears.

Traders’ sentiment about Ether (ETH) has noticeably improved as the price rallied 7.5% from Oct. 2 to 6, but the price recapturing the $1,350 level was not compelling enough to trigger any bullish activity from derivatives traders.

Ether price is still 32% below the $2,000 level last seen on Aug. 14 and the network’s average transaction fee stood near $2 after the Merge .

The most significant upgrade on the Ethereum chain happened on Sept. 15, switching from energy-intensive mining technology to a set of validators required to deposit 32 ETH in staking.

Although necessary to implement future sharding or parallel processing capability, the Merge was not designed to solve scalability issues in the current phase. Consequently, the Ethereum network holds none of the top-5 decentralized applications by users, according to DappRadar.

For this reason, analysis of derivatives data is valuable in understanding how confident investors are about Ether sustaining the rally and heading toward $1,500 or higher.

Post-Merge sentiment remains neutral-to-bearish

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

In neutral-to-bullish markets, these fixed-month contracts usually trade at a slight premium to spot markets because investors demand more money to withhold the settlement. This situation is not exclusive to crypto, and futures contracts should trade at a 4% to 8% annualized premium in healthy markets.

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

The Ether futures premium has been negative since the Merge on Sept. 15, indicating excessive demand for bearish bets, an alarming situation known as “backwardation.”

To exclude externalities specific to the futures instrument, traders must also analyze the Ether options markets. The 25% delta skew shows when market makers and arbitrage desks are overcharging for upside or downside protection.

In bullish markets, options investors give higher odds for a price pump, causing the skew indicator to fall below -12%. On the other hand, the market’s generalized panic induces a 12% or higher positive skew.

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

The 30-day delta skew stood above the 12% threshold until Oct. 3, indicating traders’ unwillingness to take downside risks using ETH options. However, the sentiment quickly changed to a neutral level on Oct. 4 as market makers and arbitrage desks have since started to price similar odds of a price hike or downturn for ETH.

A rally toward $1,500 is not expected, but is possible

Derivatives metrics suggest that pro traders are not confident in Ether testing the $1,500 resistance anytime soon. Futures contracts have been trading lower than spot market prices, indicating a lack of interest in leverage longs (buyers). Meanwhile, Ether option traders continue to price similar bull and bear cases, showing little conviction on the recent 7.5% price gains.

There are $7.7 billion in Ether contracts futures open interest, and judging by the prevalence of bearish bets, a surprise rally could potentially cause a massive short squeeze.

While leverage offers a great way to increase exposure and gains, an unexpected price swing could lead to forced liquidations tha further strengthen the price move.

Ether bulls might have difficulty gaining terrain because macroeconomic and regulatory uncertainties dictate the trend. With that said, a surprise 10% pump toward $1,500 would take bears by surprise and trigger liquidations on short positions.

Upside capped at $980B total crypto market, according to derivatives metrics

A bearish formation in the total market capitalization chart has been gaining strength after two failures to break its resistance level.

It is becoming increasingly challenging to support a bullish short-term view for cryptocurrencies as the total crypto market capitalization has been below $1.4 trillion for the past 146 days. Furthermore, a descending channel initiated in late July has limited the upside after two strong rejections.

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

The 1% weekly negative performance in cryptocurrency markets was accompanied by stagnation in the S&P 500 stock market index, which remained basically flat at $3,650. Uncertainty continues to limit the eventual recovery as worsening global economic conditions have caused trans-Pacific shipping rates to plunge 75% versus the previous year, forcing ocean carriers to cancel dozens of voyages.

Conflicting macroeconomic signals limit risk market upside

From one side, the global macroeconomic scenario improved after the United Kingdom’s government reverted plans to cut income taxes on Oct. 3. On the other hand, investors’ fear increased as global investment bank Credit Suisse’s credit default swaps reached their highest level on Oct. 3. Such instruments allow investors to protect against default, and their cost surpassed levels seen at the height of the 2008 financial crisis.

Below is a list of the winners and losers of the crypto market capitalization’s 1% loss to $935 billion. Bitcoin (BTC) stood out with a 1% gain, which led its dominance rate to hit 41.5%, the highest since Aug. 5.

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

Quant (QNT) jumped 15% on speculation that its interoperable blockchain protocol would find adoption across governmental and regulatory bodies.

Maker (MKR) gained 10.6% after MakerDAO launched a proposal to decrease the stability fee for the Curve protocol staked Ether (ETH) pool.

UniSwap Protocol (UNI) gained 10.6% after UniSwap Labs, a startup contributing to the protocol, reportedly raised over $100 million from venture capitalists.

Still, a single week of negative performance is not enough to interpret how professional traders are positioned. Those interested in tracking whales and market markers should analyze derivatives markets.

Derivatives markets point to further downside

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

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

*Accumulated 7-day perpetual futures funding rate on Oct. 3. Source: Coinglass*

Perpetual contracts reflected neutral sentiment as the accumulated funding rate was relatively flat in most cases over the past seven days. The only exception was Ether Classic (ETC), although a 0.50% weekly cost to maintain a short (bear) position should not be deemed relevant.

Since Sept. 26, the yields on the U.S. Treasury’s 5-year notes declined from 4.2% to 3.83%, indicating investors are demanding fewer returns to hold extremely safe assets. The flight-to-quality movement shows how risk-averse traders are as mixed sentiment emerges from lackluster economic indicators and corporate earnings.

For this reason, bears believe that the prevailing longer-term descending formation will continue in the upcoming weeks. In addition, professional traders’ lack of interest in leveraging cryptocurrency longs (buys) is evident in the neutral futures funding rate. Consequently, the current $980 billion market capitalization resistance should remain strong.

CFTC takes legal action against Digitex futures exchange and CEO

Many in the space have criticized regulators including the CFTC and SEC for taking a “regulation by enforcement” approach to crypto in the United States.

The United States Commodity Futures Trading Commission, or CFTC, filed a complaint against Digitex LLC and its founder and CEO Adam Todd for failing to register the cryptocurrency futures exchange and manipulating the price of its DGTX token.

According to a Sept. 30 court filing in the Southern District of Florida, Todd allegedly pumped up the price of DGTX tokens in an effort to inflate Digitex’s holdings. The U.S. regulator claimed the Digitex CEO used different corporate entities as part of a scheme to launch and operate an illegal digital asset derivatives trading platform, in violation of the Commodity Exchange Act.

CFTC rules require performing Know Your Customer (KYC) checks and implementing a customer information program. Todd said in 2020 that he planned to remove all KYC procedures from Digitex in an effort to protect user data.

The complaint said the CFTC sought a court order blocking Todd and Digitex from engaging in digital asset transactions considered commodities under the regulator’s purview. In addition, the regulator intended for Digitex to pay civil monetary penalties, disgorgement, and restitution to the affected parties. At the time of publication, both Digitex’s and its futures websites were offline.

Many in the crypto space have criticized regulators including the CFTC and Securities and Exchange Commission, or SEC, for taking a “regulation by enforcement” approach to crypto in the United States. While the SEC is currently engaged in a legal battle against Ripple over whether the firm’s Ripple (XRP) sales violated securities laws, CFTC commissioner Caroline Pham met with Ripple CEO Brad Garlinghouse as part of a “learning tour” on crypto and blockchain in September.

Pro traders don’t expect Bitcoin to break and hold $20,000 anytime soon

Bears have controlled BTC price by forcing 111 daily closes below $25,000 and derivatives data shows a reversal of this trend is highly unlikely.

One hundred and eleven days have passed since Bitcoin (BTC) posted a close above $25,000 and this led some investors to feel less sure that the asset had found a confirmed bottom. At the moment, global financial markets remain uneasy due to the increased tension in Ukraine after this week’s Nord Stream gas pipeline incident.

The Bank of England’s emergency intervention in government bond markets on Sept. 28 also shed some light on how extremely fragile fund managers and financial institutions are right now. The movement marked a stark shift from the previous intention to tighten economies as inflationary pressures mounted.

Currently, the S&P 500 is on pace for a consecutive third negative quarter, a first since 2009. Additionally, Bank of America analysts downgraded Apple to neutral, due to the tech giant’s decision to scale back iPhone production due to “weaker consumer demand.” Lastly, according to Fortune, the real estate market has shown its first signs of reversion after housing prices decreased in 77% of United States metropolitan areas.

Let’s have a look at Bitcoin derivatives data to understand if the worsening global economy is having any impact on crypto investors.

Pro traders were not excited by the rally to $20,000

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.

The three-month futures annualized premium, as seen in the chart above, should trade at +4% to +8% in healthy markets to cover costs and associated risks. The chart above shows that derivatives traders have been neutral to bearish for the past 30 days while the Bitcoin futures premium remained below 2% the entire time.

More importantly, the metric did not improve after BTC rallied 21% between Sept. 7 and 13, similar to the failed $20,000 resistance test on Sept. 27. The data basically reflects professional traders’ unwillingness to add leveraged long (bull) positions.

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

In bear markets, options investors give higher odds for a price dump, causing the skew indicator to rise above 12%. On the other hand, bullish markets tend to drive the skew indicator below negative 12%, meaning the bearish put options are discounted.

The 30-day delta skew has been above the 12% threshold since Sept. 21 and it’s signaling that options traders were less inclined to offer downside protection. As a comparison, between Sept. 10 and 13, the associated risk was somewhat balanced, according to call (buy) and put (sell) options, indicating a neutral sentiment.

The small number of futures liquidations confirm traders’ lack of surprise

The futures and options metrics suggest that the Bitcoin price crash on Sept. 27 was more expected than not. This explains the low impact on liquidations. Despite the 9.2% correction from $20,300 to $18,500, a mere $22 million of futures contracts were forcefully liquidated. A similar price crash on Sept. 19 caused a total of $97 million in leverage futures liquidations.

From one side, there’s a positive attitude since the 111-day long bear market was not enough to instill bearishness in Bitcoin investors, according to the derivatives metrics. However, bears still have unused firepower, considering the futures premium stands near zero. Had traders been confident with a price decline, the indicator would have been in backwardation.

Total crypto market cap shows strength even after the Merge and Federal Reserve rate hike

Many of the top-80 cryptocurrencies dropped by 15%+ in the past week, but the Tether premium in Asia-based futures markets shows traders remain calm.

Cryptocurrencies have been in a bear trend since mid-August after they failed to break above the $1.2 trillion market capitalization resistance. Even with the current bear trend and a brutal 25% correction, it has not been enough to break the three-month-long ascending trend.

The crypto markets’ aggregate capitalization declined 7.2% to $920 billion in the seven days leading to Sept. 21. Investors wanted to play it safe ahead of the Federal Open Markets Committee meeting, which decided to increase the interest rate by 0.75%.

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

By increasing the cost of borrowing cash, the monetary authority aims to curb inflationary pressure while increasing the burden on consumer finance and corporate debt. This explains why investors moved away from risk assets, including stock markets, foreign currencies, commodities and cryptocurrencies. For instance, WTI oil prices ceded 6.8% from Sept. 14, and the MSCI China stock market index dropped 5.1%.

Ether (ETH) also saw a 17.3% retrace during the seven-day period and many altcoins performed even worse. The Ethereum network Merge and its subsequent impact on other GPU-mineable coins caused some skewed results among the worst weekly performers.

Chiliz (CHZ) rallied 21.5% following two successful fan token launches from MIBR esports team and the VASCO soccer team from Brazil.

XRP gained 16.6% after Ripple Labs called for a federal judge to immediately rule whether the company’s XRP token sales violated U.S. securities laws.

ApeCoin (APE) gained 15% as the community expects the staking program to launch, which shall be detailed by Horizen Labs on Sept. 22.

RavenCoin (RVN) and Ethereum Classic (ETC) retraced most of their gains from the previous week as investors realized the hash rate gains from Ethereum miners did not necessarily convert into higher adoption.

Traders’ appetite did not vanish despite the correction

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

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

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

The Tether premium currently stands at 100.7%, its highest level since June 15. While still under the neutral area, the indicator showed a modest improvement over the past week. Considering that crypto markets tanked by 7.2%, this data should be viewed as a victory.

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.

*Accumulated perpetual futures funding rate on Sept. 21. Source: Coinglass*

As depicted above, the accumulated seve-day funding rate was negative for every altcoin. This data indicates excess demand for shorts (sellers), although it could be dismissed in Ether’s case because investors aiming for the free fork coins during the Merge likely bought ETH and sold futures contracts to hedge the position.

More importantly, Bitcoin’s funding rate held slightly positive during a week of price decline and potentially bearish news from the FED. Now that this critical decision has been made, investors tend to avoid placing new bets until some new data provides insights on how the economy adjusts.

Overall, the Tether premium and futures’ funding rate show no signs of stress, which is positive considering how badly crypto markets have performed.

Long the Bitcoin bottom, or watch and wait? Bitcoin traders plan their next move

Bitcoin price dropped to $18,270, but derivatives traders didn’t flinch. Here is why.

Bitcoin (BTC) faced a 9% correction in the early hours of Sept. 19 as the price traded down to $18,270. Even though the price quickly bounced back above $19,000, this level was the lowest price seen in three months. However, pro traders held their ground and were not inclined to take the loss, as measured by derivatives contracts.

*Bitcoin/USD price index, 2-hour. Source: TradingView*

Pinpointing the rationale behind the crash is extremely difficult, but some say United States President Joe Biden’s interview on CBS “60 Minutes” raised concerns about global warfare. When responding to whether U.S. forces would defend Taiwan in the event of a China-led invasion, Biden replied: “Yes, if in fact, there was an unprecedented attack.”

Others cite China’s central bank lowering the borrowing cost of 14-day reverse repurchase agreements to 2.15% from 2.25%. The monetary authority is showing signs of weakness in the current market conditions by injecting more money to stimulate the economy amid inflationary pressure.

There is also pressure from the upcoming U.S. Federal Reserve Committee meeting on Sept. 21, which is expected to hike interest rates by 0.75% as central bankers scramble to ease the inflationary pressure. As a result, yields on the 5-year Treasury notes soared to 3.70%, the highest level since November 2007.

Let’s look at crypto derivatives data to understand whether professional investors changed their position while Bitcoin crashed below $19,000.

There was no impact on BTC derivatives metrics during the 9% crash

The indicator should trade at a 4% to 8% annualized premium in healthy markets to cover costs and associated risks. Thus, one can safely say that derivatives traders had been neutral to bearish for the past two weeks as the Bitcoin futures premium held below 2% the entire time.

More importantly, the shakeout on Sept. 19 did not cause any meaningful impact on the indicator, which stands at 0.5%. This data reflects professional traders’ unwillingness to add leveraged short (bear) positions at current price levels.

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

In bear markets, options investors give higher odds for a price dump, causing the skew indicator to rise above 12%. On the other hand, bullish trends tend to drive the skew indicator below negative 12%, meaning the bearish put options are discounted.

The 30-day delta skew had been near the 12% threshold since Sept. 15, and signaled that options traders were less inclined to offer downside protection. The negative price move on Sept. 19 was not enough to flip those whales bearish, and the indicator currently stands at 11%.

The bottom could be in, but it depends on macroeconomic and global hurdles

Derivatives metrics suggest that the Bitcoin price dump on Sept. 19 was partially expected, which explains why the $19,000 support was regained in less than two hours. Still, none of this will matter if the U.S. Federal Reserve raises the interest rates above the consensus or if stock markets collapse further due to the energy crisis and political tensions.

Therefore, traders should continuously scan macroeconomic data and monitor the central banks’ attitude before trying to pin a flag on the ultimate bottom of the current bear market. Presently, the odds of Bitcoin testing sub-$18,000 prices remain high, especially considering the weak demand for leverage longs on BTC futures.

Long the Bitcoin bottom, or watch and wait? BTC traders plan their next move

Bitcoin price dropped to $18,270, but derivatives traders didn’t flinch. Here is why.

Let’s look at crypto derivatives data to understand whether professional investors changed their position while Bitcoin crashed below $19,000.

There was no impact on BTC derivatives metrics during the 9% crash

The bottom could be in, but it depends on macroeconomic and global hurdles

3 major mistakes to avoid when trading cryptocurrency futures markets

Crypto traders love to “ape” and make “degen” investments using high leverage in futures markets, but most traders fall victim to these three key mistakes.

Many traders frequently express some relatively large misconceptions about trading cryptocurrency futures, especially on derivatives exchanges outside the realm of traditional finance. The most common mistakes involve futures markets’ price decoupling, fees and the impact of liquidations on the derivatives instrument.

Let’s explore three simple mistakes and misconceptions that traders should avoid when trading crypto futures.

Derivatives contracts differ from spot trading in pricing and trading

Currently, the aggregate futures open interest in the crypto market surpasses $25 billion and retail traders and experienced fund managers use these instruments to leverage their crypto positons.

Futures contracts and other derivatives are often used to reduce risk or increase exposure and are not really meant to be used for degenerate gambling, despite this common interpretation.

Some differences in pricing and trading are usually missed in crypto derivatives contracts. For this reason, traders should at least consider these differences when venturing into futures markets. Even well-versed derivatives investors from traditional assets are prone to making mistakes, so it’s important to understand the existing peculiarities before using leverage.

Most crypto trading services do not use United States dollars, even if they display USD quotes. This is a big untold secret and one of the pitfalls that derivatives traders face that causes additional risks and distortions when trading and analyzing futures markets.

The pressing issue is the lack of transparency, so clients don’t really know if the contracts are priced in stablecoin. However, this should not be a major concern, considering there is always the intermediary risk when using centralized exchanges.

Discounted futures sometimes come with surprises

On Sept. 9, Ether (ETH) futures that mature on Dec. 30 are trading for $22 or 1.3% below the current price at spot exchanges like Coinbase and Kraken. The difference emerges from the expectation of Merge fork coins that could arise during the Ethereum Merge. Buyers of the derivatives contract will not be awarded any of the potentially free coins that Ether holders may receive.

Airdrops can also cause discounted futures prices since the holders of a derivatives contract will not receive the award, but that’s not the only case behind a decoupling since each exchange has its own pricing mechanism and risks. For example, Polkadot quarterly futures on Binance and OKX have been trading at a discount versus Polkadot (DOT) price on spot exchanges.

*Binance Polkadot (DOT) quarterly futures premium. Source: TradingView*

Notice how the futures contract traded at a 1.5% to 4% discount between May and August. This backwardation demonstrates a lack of demand from leverage buyers. However, considering the long-lasting trend and the fact that Polkadot rallied 40% from July 26 to Aug. 12, external factors are likely in play.

The futures contract price has decoupled from spot exchanges, so traders must adjust their targets and entry levels whenever using quarterly markets.

Higher fees and price decoupling should be considered

The core benefit of futures contracts is leverage, or the ability to trade amounts that are larger than the initial deposit (collateral or margin).

Let’s consider a scenario where an investor deposited $100 and buys (long) $2,000 worth of Bitcoin (BTC) futures using 20x leverage.

Even though the trading fees on derivatives contracts are usually smaller than spot markers, a hypothetical 0.05% fee applies to the $2,000 trade. Therefore, entering and exiting the position a single time will cost $4.00, which is equivalent to 4% of the initial deposit. That might not sound much, but such a toll weighs as the turnover increases.

Even if traders understand the additional costs and benefits of using a futures instrument, an unknown element tends to present itself only in volatile market conditions. Decoupling between the derivatives contract and the regular spot exchanges is usually caused by liquidations.

When a trader’s collateral becomes insufficient to cover the risk, the derivatives exchange has a built-in mechanism that closes the position. This liquidation mechanism might cause drastic price action and consequent decoupling from the index price.

Although these distortions will not trigger further liquidations, uninformed investors might react to price fluctuations that only happened in the derivatives contract. To be clear, the derivatives exchanges rely on external pricing sources, usually from regular spot markets, to calculate the reference index price.

There is nothing wrong with these unique processes, but all traders should consider their impact before using leverage. Price decoupling, higher fees and liquidation impact should be analyzed when trading in futures markets.