- The recent 11.4% correction in Bitcoin price has raised questions about the market structure.
- Reduced liquidity has been pointed out as a possible reason for recent volatility spikes.
- An analysis of the derivatives market can provide insights into the impact of the recent price drop.
- Two previous instances of significant price drops in Bitcoin are worth considering.
- Bitcoin futures premiums indicate the market sentiment during price corrections.
- Options markets can also provide insight into professional traders’ risk aversion.
- Data suggests that professional traders are not adopting a bearish stance.
In recent months, Bitcoin traders have become accustomed to relatively low volatility. However, historical data shows that price swings of 10% in just a few days are not uncommon for the cryptocurrency. The recent correction of 11.4% from $29,340 to $25,980 has led to the largest liquidation since the collapse of FTX in November 2022. The question now is whether this correction has had a significant impact on the market structure.
Experts have suggested that reduced liquidity may be the cause of recent volatility spikes. However, further analysis is needed to confirm this. Examining the derivatives market can provide valuable insights into the impact of the price drop to $26,000. This analysis aims to determine whether whales and market makers have turned bearish or if they are demanding higher premiums for protective hedge positions.
To gain a better understanding, it is helpful to look at previous instances of significant price drops in Bitcoin. Two such instances stand out. The first occurred in March 2023 when Bitcoin plummeted by 11.4% to $19,600 following the liquidation of Silvergate Bank. The second occurred in April 2023 when Bitcoin’s price dropped by 10.4% after Gary Gensler, the Chair of the U.S. Securities and Exchange Commission (SEC), made statements that did not provide reassurance to the market.
BTC quarterly futures typically trade at a slight premium compared to spot markets. This reflects sellers’ preference for additional compensation for delaying settlement. Healthy markets usually have futures contracts trading with an annualized premium ranging from 5% to 10%. Before the March 8 crash, Bitcoin’s futures premium was at 3.5%. However, during the crash, it shifted to a discount of 3.5%, indicating bearish market conditions. On the other hand, the April 19 correction had minimal impact on Bitcoin’s futures premium, suggesting professional traders were either confident in the market structure or well-prepared for the correction.
Comparing the most recent event, the 11.4% BTC crash in August, reveals differences from previous instances. The derivatives market rapidly absorbed the shock, with the BTC futures premium returning to a neutral-to-bullish position. This indicates that the decline to $26,000 did not significantly dampen the optimism of whales and market makers.
Examining options markets can also provide insights into professional traders’ sentiment. The delta skew metric, which measures the anticipation of a price drop, remained within the neutral range and did not breach the 7% threshold during the recent correction. This suggests that professional traders are not adopting a bearish stance.
In conclusion, both futures and options metrics suggest that professional traders are not bearish on Bitcoin. While this does not guarantee an immediate return to the $29,000 support level, it reduces the likelihood of an extended price correction.
