Professional Bitcoin Traders Are Not Comfortable With Bullish Positions

The previous $19,000 support level for bitcoin (BTC) is becoming more distant after the 22.5% gain in nine days. However, there was little hope as the impact of the Three Arrows (3AC), Voyager, Babel Finance and Celsius crises remains uncertain. In addition, the contagion claimed another victim after the Thai cryptocurrency exchange Zipmex stopped withdrawals on July 20.

The bulls’ hope rests on strengthening the $23,000 support over time, but derivatives metrics show that professional traders remain highly skeptical of a sustained recovery.

Macro Headwinds in favor of Scarce Assets

Some analysts attribute the cryptocurrency market’s strength to China’s weaker-than-expected gross domestic product data, leading investors to expect further expansionary measures from policymakers. China’s economy grew 0.4% in the second quarter from a year earlier as the country continues to grapple with self-imposed restrictions to stop another outbreak of COVID-19 infections, according to CNBC.

UK inflation of 9.4% in June marked a 40-year high, and to help the people, Chancellor of the Exchequer Nadhim Zahawi announced a 44-year, $5bn (£37bn) aid package for vulnerable families.

Under these circumstances, bitcoin reversed its downward trend as policymakers struggled to solve the seemingly impossible problem of shrinking economies amid ever-increasing public debt.

However, the cryptocurrency industry faces its own challenges, including regulatory uncertainties. For example, on July 21, the US Securities and Exchange Commission (SEC) labeled nine tokens “crypto-asset securities,” which means not only that they fall under the jurisdiction of the regulator, but also that they are guilty of not registering with it.

The SEC specifically referenced Powerledger (POWR), Kromatika (KROM), DFX Finance (DFX), Amp (AMP), Rally (RLY), Rari Governance Token (RGT), DerivaDAO (DDX), LCX and XYO. A former Coinbase product manager has been sued by the regulator for “insider trading” after they allegedly used non-public information for their personal gain.

Currently, bitcoin investors are facing too much uncertainty despite a seemingly favorable macroeconomic background, which should favor rare assets like BTC. This is why it is valuable to analyze derivative data to understand whether investors are pricing in any disadvantage.

Professional traders are still skeptical of price rally

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 constant fluctuations in contract funding rates.

These fixed-month contracts typically trade at a small premium to spot markets, as investors demand more cash to maintain a settlement. But this situation is not exclusive to cryptocurrency markets, so the future should trade at an annual premium of 4-10% in healthy markets.

The bitcoin futures premium flirted with the negative zone in mid-June, which is usually seen during extremely bearish periods. The base rate of barely 1%, or the annual premium, reflects the reluctance of professional traders to create long leveraged (bullish) positions. Investors are still skeptical of the price rally, despite the low cost of opening bullish trade.

It is also necessary to analyze the bitcoin options markets to exclude the 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.

In bear markets, options investors give more chance to a price drop, causing the asymmetry indicator to exceed 12%, while in bull markets the opposite is true.

The 30-day skew delta peaked at 21% on July 14, as bitcoin struggled to clear the $20,000 resistance. The higher the indicator, the less inclined options traders are to offer downside protection.

Later, the indicator has broken below the 12% threshold, entering a neutral zone, and is no longer at levels that indicate a major avoidance. As a result, options markets are currently showing a balanced risk assessment between a bull run and a retest of the $20,000 area.

Some metrics suggest that the bottom of the bitcoin cycle is behind us, but until traders get better insight into the regulatory outlook and the liquidity of centralized cryptocurrency service providers as the Three Arrows crisis unfolds in Capital, the odds are where the $24,000 mark will be broken remains uncertain.

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