Downbeat Fed comments and bitcoin derivatives data point to further BTC decline

Downbeat Fed comments and bitcoin derivatives data point to further BTC decline

A $750 pump on August 26 took bitcoin (BTC) from $21,120 to $21,870 in less than two hours. However, that move was completely scrapped after comments from US Federal Reserve Chairman Jerome Powell, who reiterated the bank’s commitment to contain inflation by tightening the economy. After Powell’s speech, BTC price fell all the way to $20,700.

Bitcoin/USD price in 30 minutes. Source: Trade View

In Jackson Hole, Powell specifically stated that “historical data strongly cautions against premature easing of policy.” Immediately after the statements, US equity indices reacted negatively, with the S&P 500 falling 2.2% within an hour.

On the bitcoin chart, the “Bart candle”, a reference to the shape of Bart Simpson’s head and a descriptor of BTC’s rising and falling price action, has appeared. Apart from these unpredictable technical analysis indicators, other indicators have shown Bitcoin’s broader outlook from neutral to bearish.

Regulators Accelerate Cryptocurrency Legislation

The flow of cryptocurrency news has been negative for some time, which has also weighed on investor sentiment. On August 24, the US Federal Deposit Insurance Corporation (FDIC) sent cease and desist letters to five companies for allegedly misrepresenting deposit insurance related to cryptocurrencies, including FTX US.

On August 25, anti-money laundering officials raided the premises of India-based cryptocurrency exchange CoinSwitch for alleged violations of currency laws. Launched in India in 2020, CoinSwitch successfully raised capital from Coinbase Ventures, Andreessen Horowitz, Sequoia, and Tiger Global.

Finally, on August 26, the US Securities and Exchange Commission postponed its decision on a spot bitcoin exchange-traded fund (ETF) offered by global investment firm VanEck. Although the chances of approval were low, it boosted the regulator’s anti-encryption sentiment.

As a result, cryptocurrency investors face continued uncertainty despite the seemingly benign inflationary scenario, which should favor limited supply assets. This is why it is crucial to analyze cryptocurrency derivatives to understand whether investors have underestimated risks.

Professional traders were neutral to bearish ahead of the decline

Quarterly futures are generally avoided by retail traders because of their price difference from spot markets. However, they are the preferred instruments of professional traders because they avoid the constant fluctuation in financing rates that often occurs in a contract.

3-month annual bitcoin futures premium. Source: Laevitas

In healthy markets, the indicator should trade with a 4-8% annual premium to cover the associated costs and risks. However, this was not the case, as the bitcoin futures premium remained below 1.8% throughout the period. This data shows the reluctance of professional traders to add long leveraged (bullish) positions.

Also read: CME bitcoin futures post record discount amid ‘very sensible sentiment’

Bitcoin options markets must also be analyzed to rule out externalities specific to the futures instrument. For example, the 25% delta skew is a telltale sign when market makers and arbitrage desks are overpricing protection up or down.

delta skew of 25% of bitcoin options at 30 days: Source: Laevitas

In bear markets, options investors give more chances to a price drop, which causes the asymmetry indicator to exceed 12%. The 30-day delta skew indicator has been near the neutral-to-bearish threshold since August 22, indicating that options traders are less inclined to offer downside protection.

These two derived metrics suggest that the fall in bitcoin price on August 26 may have followed the traditional performance of the stock market, but cryptocurrency traders certainly did not expect a positive move.

The derivatives data leaves no room for bullish interpretations as the sentiment deteriorated after Powell’s comments and also shows that market conditions are weakening.

The views and opinions expressed here are solely those of theauthor and those do not necessarily represent Cointelegraph. All investment and trading involves risk. You should do your own research before making a decision.

SEC delays third VanEck application for spot bitcoin ETF

SEC delays third VanEck application for spot bitcoin ETF

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