Leverage

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.

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

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.

Ethereum price weakens near key support, but traders are afraid to open short positions

ETH price hovers at a key support level and while it is softening, data shows pro traders are reluctant to go short.

Ether (ETH) has been stuck between $1,170 to $1,350 from Nov. 10 to Nov. 15, which represents a relatively tight 15% range. During this time, investors are continuing to digest the negative impact of the Nov. 11 Chapter 11 bankruptcy filing of FTX exchange.

Meanwhile, Ether’s total market volume was 57% higher than the previous week, at $4.04 billion per day. This data is even more relevant considering the collapse of Alameda Research, the arbitrage and market-making firm controlled by FTX’s founder Sam Bankman-Fried.

On a monthly basis, Ether’s current $1,250 level presents a modest 4.4% decline, so traders can hardly blame FTX and Alameda Research for the 74% fall from the $4,811 all-time high reached in November 2021.

While contagion risks have caused investors to drain centralized exchanges wallets, the movement led to an uptick in decentralized exchanges (DEX) activity. Uniswap, 1inch Network, and SushiSwap saw a 22% increase in the number of active addresses since Nov. 8.

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

Margin markets show no signs of distress

Margin trading allows investors to borrow cryptocurrency to leverage their trading position, potentially increasing their returns. For example, one can buy Ether by borrowing Tether (USDT), thus increasing their crypto exposure. On the other hand, borrowing Ether can only be used to short it or bet on a 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/ETH margin lending ratio. Source: OKX*

The chart above shows investors’ morale topped on Nov. 13 as the ratio reached 5.7, the highest in two months. However, from that point onward, OKX traders presented less demand for bets on the price uptrend as the indicator declined to the current 4.0 level.

Still, the current lending ratio leans bullish in absolute terms, favoring stablecoin borrowing by a wide margin. It is worth highlighting that the overall sentiment improved since Nov. 8 as traders increased demand for margin longs using stablecoins.

Long-to-short data shows reduced demand for leverage longs

The top traders’ long-to-short net ratio excludes externalities that might have solely impacted the margin markets. By aggregating the positions on the spot, perpetual and quarterly futures contracts, analysts can better understand whether professional traders are leaning bullish or bearish.

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

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

The long-to-short ratio at Huobi stood at 0.98 between Nov. 8 and Nov. 15, indicating a balanced situation between leverage buyers and sellers. On the other hand, Binance traders initially faced a deep contraction in the demand for longs, but the movement was utterly subdued as buying activity dominated from Nov. 11 onward.

At the OKX exchange, the metric plunged from 1.30 on Nov. 8 to the present 0.81, favoring shorts. Therefore, according to the long-to-short indicator, the top traders significantly reduced their longs until Nov. 10, but then proceeded to increase long positions.

From a derivatives analysis point of view, neither futures nor margin markets display excess demand for shorts. Had the panic-based sentiment prevailed, one would expect worsening conditions on the Ether lending and long-to-short indicators.

Consequently, bulls are in control as traders are not comfortable taking bearish positions with ETH below $1,300.

Bitcoin derivatives data reflects traders’ mixed feelings below $17,000

Derivatives data shows increased demand for margin longs, contradicting traders’ perception that further downside is in store for Bitcoin.

Bitcoin (BTC) lost 25.4% in 48 hours, bottoming at $15,590 on Nov. 9 as investors rushed to exit positions after the second-largest cryptocurrency exchange, FTX, halted withdrawals. More importantly, the sub-$17,000 levels were last seen almost two years prior, and the fear of contagion became evident.

The move liquidated $285 million worth of leverage long (bull) positions, leading some traders to predict a potential downside of $13,800.

What an exciting time to be alive! Loving the volatility these elites are creating! They really wana buy LOW before the next bull cycle! Thank goodness we were ready months in advanced!

Are we gona hit that 13k target? Who cares, its a huge buy opportunity long term! $BTC #BTC pic.twitter.com/2v0ThmIoNG

— JD (@jaydee_757) November 14, 2022

As described by independent market analyst Jaydee_757, the bearish trend continues to exert its pressure, with $17,200 as a resistance level. Still, such an analysis provides no guarantee that the ultimate $13,800 bottom will be hit.

Curiously, the price action coincided with improving conditions for global equity markets on Oct. 4, as the S&P 500 index gained 6.4% between Nov. 10 and Nov. 11 and the tech-heavy Nasdaq Composite rallied 9.5%. Hence, at least from a technical perspective, Bitcoin completely decoupled from traditional finance.

Additional uncertainty on Bitcoin has been brought on by Grayscale Bitcoin Trust shares trading on over-the-counter stock markets after the $11.4 billion fund discount to its assets surpassed 40%.

watching GBTC liquidity and lenders exposure to said product for contagion risk

seems someone is selling a lot of GBTC

discount is now >40% and widening, implied BTC price is $9K, and a lot of GBTC is sitting in toxic places atm

— Vance Spencer (@pythianism) November 11, 2022

As noted by Vance Spencer, the implied BTC price according to the funds’ trading is below $9,000, and pressure should continue if some holders use their shares as collateral for loans.

Still, the negative sentiment that caused Bitcoin to break below $20,000 does not mean professional investors are bearish at the current price levels.

Margin traders did not close their longs

Monitoring margin and options markets provide excellent insight into how professional traders are positioned, allowing investors to borrow cryptocurrency to leverage their trading position.

For instance, one can increase exposure by borrowing stablecoins to buy an additional Bitcoin position. 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 USDT/BTC margin lending ratio. Source: OKX*

The above chart shows that OKX traders’ margin lending ratio increased from Nov. 8 to Nov. 10, signaling that traders did not close their leverage longs despite the 25.4% price correction.

Furthermore, the metric continues to favor stablecoin borrowing by a wide margin, indicating traders have been holding bullish positions.

Option markets flipped bearish

Traders should scan options markets to understand whether Bitcoin can reclaim the $18,500 support. The 25% delta skew is a telling sign whenever arbitrage desks and market makers are overcharging for upside or downside protection.

The indicator compares similar call (buy) and put (sell) options and will turn positive when fear is prevalent because the protective put options premium is higher than risk call options.

The skew indicator will move above 10% if traders fear a Bitcoin price crash. On the other hand, generalized excitement reflects a negative 10% skew.

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

As displayed above, the 25% delta skew had been below 10% since Oct. 26, but it quickly moved above that threshold on Nov. 8, suggesting options traders were pricing a higher risk of unexpected price dumps.

Whenever this metric stands above 10%, it signals that traders are fearful and reflects a lack of interest in offering downside protection.

FUD dismissal does not happen overnight

Despite the bearish Bitcoin options indicator, the OKX margin lending rate showed whales and market makers maintaining bullish bets. The contagion fear might explain the mixed feeling as investors struggle to interpret recent movements by the Crypto.com exchange, including an “accidental” transfer of 320,000 Ether (ETH) to Gate.io.

Run on Crypto com starts after FTX collapse. Investors began pulling funds from Singapore-based crypto exchange in a sign that the dramatic collapse of FTX is sparking contagion among exchanges. Cronos, token underpinning Crypto com business, has plunged. https://t.co/evk4J1vnnL pic.twitter.com/wMJmvch2D0

— Holger Zschaepitz (@Schuldensuehner) November 14, 2022

Analyst Holger Zschaepitz’s post describes investors’ current sentiment as unwilling to take risks on centralized exchanges offering similar products and services from the now-bankrupt FTX.

Consequently, derivatives are reflecting low confidence in regaining the $18,500 support until more data shows that the cryptocurrency ecosystem’s liquidity has been restored.

Bitcoin bulls fail to hold $21K, but pro traders refuse to flip bearish

BTC bears have successfully suppressed Bitcoin price below $25,000 for 147 daily closes, but derivatives data shows no desperation from pro traders.

147 days have passed since Bitcoin (BTC) closed above $25,000, and the result is that investors are less sure that the $20,000 support will hold. Backing these concerns are persistent global financial and macroeconomic tensions, which escalated on Nov. 7 after European Union officials expressed concerns over the $369 billion United States Inflation Reduction Act.

The extended tax, health and climate bill was approved in August and it also includes subsidies for electric cars and battery supply chains that are made in North America.

According to CNBC, this is not the first time that Europe has expressed its concerns, citing international trade rules and “discriminatory” policies.

There’s additional uncertainty coming from the Nov. 8 U.S. midterm elections, which will determine which party controls Congress. Currently, Democrats have a majority in the Lower House, but a change in this status could ease President Biden’s future spending plans.

In other news, Apple announced a temporary reduction in iPhone 14 production due to COVID-19 restrictions in China. To put things in perspective, Apple’s $2.2 trillion market capitalization has surpassed the sum of Alphabet (Google) and Amazon.

Let’s look at Bitcoin derivatives data to understand if the worsening global macroeconomic conditions have impacted crypto investors.

Pro traders were not excited by the rally above $21,000

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.

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

The three-month futures annualized premium 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 week as the Bitcoin futures premium remained below 2.5% the entire time.

More importantly, the metric did not improve after BTC rallied 7% between Nov. 3 and Nov. 5 to test the $21,500 resistance. That price level was the highest since Sept. 13, so the data reflects professional traders’ unwillingness to add leveraged long (bull) positions.

Margin markets show bulls’ resilience

Traders should also analyze the margin trading markets to understand how professional traders are positioned. Margin trading allows investors to borrow cryptocurrency to leverage their trading position. For example, one can increase exposure by borrowing stablecoins to buy an additional Bitcoin position.

On the other hand, Bitcoin borrowers can only short the cryptocurrency because they bet on its price declining. However, unlike futures contracts, the balance between margin longs and shorts isn’t always matched.

Data shows that OKX traders’ margin lending ratio has remained relatively stable at 8 for the past week. From one side, the indicator is somewhat concerning, giving the rally from $20,050 to $21,475 on Nov. 5, which should have positively impacted the margin lending ratio. The present 8.1 level leaves enough room for sustainable leverage buying pressure when the time comes.

The metric remains bullish by favoring stablecoin borrowing by a wide margin. In a nutshell, pro traders have been holding bullish positions using stablecoin margin lending.

The futures and margin metrics suggest that Bitcoin’s failure to hold the $21,000 support was insufficient in instilling panic in pro traders. The data also shows a modest degree of apathy because the recent 7% rally toward $21,500 was not accompanied by higher demand for leverage longs.

Bears continue to exert their strength even as the elusive $25,000 daily close becomes even more distant. Until macroeconomic conditions and political uncertainty dominate the headlines, bulls are less likely to have high hopes of a more sustainable rally.

Bitcoin bulls aim for a post-FOMC win in Friday’s $640M BTC options expiry

FOMC meeting-induced volatility is impacting BTC price, but bulls are still aiming for a win in this week’s $640 million options expiry.

The past few months have been painful for Bitcoin (BTC) bulls, but they are not alone. The United States Federal Reserve’s tightening economic policy has led investors to seek protection in cash positions and inflation-protected bonds.

Surging inflation and recession signals have caused the S&P 500 stock market index to retreat 19% year-to-date. Even gold — previously considered a safe asset — is suffering the consequences, trading down 20% from its all-time high.

The increasing costs of a home mortgage added fear that a housing crisis might be underway. Since the Fed started raising interest rates in March, borrowing costs have gone up and up, and mortgage rates have reached multi-decade highs.

Regardless of the prevailing bearish sentiment, Bitcoin bulls could still profit by $270 million on Friday’s options expiry.

$640 million in options expire on Nov. 4

According to the Nov. 4 options expiry open interest, Bitcoin bears concentrated their bets between $16,000 and $20,000. These levels might seem gloomy right now, but Bitcoin was trading below $19,500 two weeks ago.

*Bitcoin options aggregate open interest for Nov. 4. Source: Coinglass*

At first sight, the $335-million put (sell) options dominate the $305-million call (buy) instruments, but the 0.92 call-to-put ratio does not really tell the whole story. For example, the 7.5% BTC price pump since Oct. 21 wiped out most bearish bets.

A put option gives the buyer a right to sell BTC at a fixed price at 8:00 am UTC on Nov. 4. However, if the market trades above that price, there is no value in holding that derivative contract, so its value goes to zero.

Therefore, if Bitcoin remains above $20,000 at 8:00 am UTC on Nov. 4, only $30 million of those put (sell) options will be available at the expiry.

Bulls will fight to send Bitcoin above $22,000

Here are the four most likely scenarios for Friday’s options expiry. The imbalance favoring each side represents the theoretical profit. In other words, depending on the expiry price, the active quantity of call (buy) and put (sell) contracts varies:

Between $19,000 and $20,000: 500 calls vs. 5,100 puts. The net result is $90 million favoring the put (bear) instruments.
Between $20,000 and $21,000: 3,300 calls vs. 1,500 puts. The net result favors the call (bull) instruments by $40 million.
Between $21,000 and $22,000: 7,500 calls vs. 200 puts. The net result favors bulls by $155 million.
Between $22,000 and $23,000: 12,200 calls vs. 0 puts. Bulls are completely dominant, profiting $270 million.

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

Bears need a sub $20,000 to secure a win

A mere 3% price dump from the current $20,500 level is enough for Bitcoin bears to secure a $90 million profit on the Nov. 4 options expiry. However, these traders have undergone a $780 million liquidation in futures contracts between Oct. 24 and Oct. 28, meaning they might have less margin to subdue bulls’ upward pressure.

For now, Bitcoin bears need to catch short-term negative headwinds triggered by tighter macroeconomic conditions to secure a win.

Consequently, options market data slightly favors the call (buy) options, even though a $270 million profit seems distant for BTC bulls.

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.

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.

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.

Crypto markets to see ‘explosive volatility’ soon: Arcane Research

Ballooning leverage and reduced volatility on crypto markets create a situation where explosive volatility is very possible in the short-to-medium term.

After weeks of reduced volatility, cryptocurrencies like Bitcoin (BTC) are likely to see sharp price changes in the short-to-medium term, according to one analyst.

The current situation in cryptocurrency markets could potentially generate “explosive volatility” due to massive leverage and recent low volatility, Arcane Research analyst Vetle Lunde suggested.

Lunde pointed to “leverage bonanza,” or leverage going parabolic in the crypto derivatives market, while Bitcoin has continued to hover around $19,000 over the past few weeks.

In crypto trading, leverage refers to using borrowed funds to make trades in order to profit bigger through contracts like perpetual swaps. According to Arcane, notional open interest (OI) in Bitcoin perpetual contracts was nearing 500,000 BTC as of Oct. 11, which marked parabolic growth in leverage amid Bitcoin’s flattening volatility.

*Bitcoin perpetual swaps’ open interest by Arcane Research. Source: Laevitas*

While forecasting potential bursts of volatility in the short or medium term, Lunde avoided predicting exact market moves, stating:

“I view the current open interest as well blown above any levels that may be assessed as sustainable, opaqueness from market signals restricts me from having any directional view on the winddown of said leverage.”

The analyst also stressed that the current market could benefit sophisticated traders that are familiar with the straddle strategy, which involves simultaneously buying both a put option and a call option with the same price and the same expiration date.

In the medium term, Lunde pointed to the growing trend in OI in crypto derivatives, which could lead to a “very volatile” breakout. As previously reported, Bitcoin futures OI hit an all-time high, with BTC-denominated futures OI hitting 660,000 BTC on Oct. 12.

Lunde also mentioned a few potent triggers in the medium term for crypto, including potential BTC purchases by Michael Saylor’s MicroStrategy in November. “If the usual MicroStrategy riddance repeats, expect small rallies and brief hardcore sell-offs as MicroStrategy bids and then announces its purchases for the remainder of Q4 2022,” the analyst wrote.

No matter what trend is coming in the short-to-medium term, the Arcane Research analyst is still bullish on Bitcoin over a longer period of time. Lunde expressed confidence that the next year will bring “idiosyncratic crypto-related regulatory clarity” in the United States as well as a more stable interest rate and inflation regime.

He also predicted more crypto growth as major financial institutions like BlackRock, Citadel, and Nasdaq have been moving into the industry recently. He stated:

“I am certain that the show will go on, and new highs will be met in a not too far distant future.”

As previously reported, some major financial institutions like JPMorgan set a long-term theoretical target for Bitcoin at $150,000.

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.

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.

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.