Key Bitcoin Options 'Fear' Metric Reflects Traders' Regulatory Worries

After trading above $42,000 for 46 consecutive days, the price of Bitcoin (BTC) started to show weakness on Sept. 21. In the past three days, the cumulative decline of 13% was enough to erase the hard-won gains since August 6. Historical data also shows that the previous bear market cycle lasted 79 days before returning to the important level of $42,000.

Traders' attention turned to the start of the U.S. Federal Reserve's monetary meeting, which is expected to indicate whether it will trim its $120 billion monthly asset buyback stimulus program. Strangely, while all this was happening, the iShares MSCI China ETF ($MCHI), which measures Chinese equities, rallied 1% on Sept. 21.

Is China Really the Root of the Recent Pullback?

The apparent disconnect between bitcoin's performance and a slight recovery in global markets has investors questioning whether cryptocurrency regulation has played a role in the current bear market.

In an interview with The Washington Post today, Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), called stablecoins “a tool used at the casino table.”

The crackdown on cryptocurrencies by U.S. regulators over the past six months looks set to get worse with each passing day. Not even sure what effect it will have on the market, but there's certainly nothing to be optimistic about right now.

— Grant Gulovsen, Esq. (@gulovsen) September 19, 2021

As attorney Grant Gulovsen points out, the looming shadow of regulation is expected to have short-term bearish effects, and investors in any market hate uncertainty about which products and services will be allowed.

Bitcoin price on Coinbase. Source: TradingView

Note that the $42,000 level is crucial in determining the end of the mini-bear cycle that was said to be triggered by Elon Musk’s May 12 comments regarding the energy use of Bitcoin mining.

To effectively gauge how professional traders are pricing in the risk of a further price crash, investors should monitor the 25% delta skew, which compares similar call (buy) and put (sell) options. It turns positive when a protective put option pays a higher premium than a similarly risky call option.

A skew indicator that fluctuates between -7% and +7% is generally considered neutral. On the other hand, whenever the cost of downside protection is high, this indicator moves above the range, which is usually a "fear" indicator.

Deribit Bitcoin Options 25% delta skew Source: Laevitas

As the chart above shows, Bitcoin options traders have remained neutral since July 25, when the indicator fell below the 7% threshold. However, recent price action has caused short-term options traders to enter "fear" mode after this indicator reached 9%.

Options Market Confirms Lack of Investor Confidence

In order to rule out external factors specific to this option instrument, the perpetual futures market should also be analyzed.

Unlike ordinary monthly contracts, perpetual futures prices are very similar to those of ordinary spot transactions. This feature makes things easier for retail investors, as they no longer need to calculate contango or rollover positions.

The funding rate was introduced to balance the risk exposure of the trade, and when longs (buyers) ask for more leverage, they are charged the funding rate. However, when the opposite is true and the shorts (sellers) are over-leveraged, the funding rate is negative, so they become the party paying the fee.

Bitcoin 8-hour USDT/USD futures funding rate Source: Bybt

The chart above shows that Bitcoin’s funding rate keeps turning negative, though not sustainable or relevant. For example, a rate of 0.05% charged every 8 hours, equivalent to 1% per week, should not force any derivatives traders to liquidate their positions.

Thus, the options market data confirmed the "fear" indicator from a positive 25% delta skew. Buyers using the derivatives market lack confidence, which may be related to recent negative regulatory concerns. The latest victim of regulatory pressure is the Coinbase exchange, which has decided to drop plans to offer cryptocurrency lending.

Cointelegraph Chinese is a blockchain news information platform, and the information provided only represents the author's personal opinion, has nothing to do with the position of the Cointelegraph Chinese platform, and does not constitute any investment and financial advice. Readers are requested to establish correct currency concepts and investment concepts, and earnestly raise risk awareness. In view of the fact that China has not yet issued policies and regulations related to digital assets, users in mainland China are advised to be cautious in digital currency investment.