The month-to-date chart for Bitcoin (BTC) is very bearish, with levels below $18,000 seen over the weekend representing the lowest prices since December 2020. The bulls' hopes for now depend on turning $20,000 into support, but derivatives indicators are telling a completely different story, with professional traders remaining extremely skeptical.
Notably, the S&P 500 fell 11% in June, and even multibillion-dollar companies like Netflix, PayPal, and Caesars Entertainment corrected losses of 71%, 61%, and 57%, respectively.
The U.S. Federal Open Market Committee raised its benchmark interest rate by 75 basis points on June 15, with Federal Reserve Chairman Jerome Powell signaling that more aggressive tightening is likely as the monetary authority continues to try to curb inflation. However, investors and analysts fear the move would increase recession risks. According to Bank of America's June 17 notice to customers:
“Our worst fears about the Fed have been confirmed: they are well behind the curve and are now playing a dangerous game of catch-up.”
Moreover, according to analysts at global investment bank JPMorgan, the record total stablecoin market share among cryptocurrencies “suggests that the cryptocurrency market will be oversold and will rise significantly.” A low percentage of the total cryptocurrency market capitalization is associated with limited crypto potential.
Currently, cryptocurrency investors face a mix of recession fears and optimism over strengthening support at $20,000 as stablecoins could eventually flow into bitcoin and other cryptocurrencies. For this reason, analysis of derivatives data is valuable in understanding whether investors are pricing in a higher probability of an economic downturn.
Bitcoin futures premium turns negative for first time in a year
Retail traders typically steer clear of quarterly futures because of the price differential from the spot market, but they are the vehicle of choice for professional traders because they avoid permanent fluctuations in contract funding rates.
These fixed-month contracts typically trade at a slightly higher price than the spot market because investors need more money to keep settlements. This situation is not unique to the crypto market. Therefore, in a healthy market, futures should trade at an annualized premium of 5% to 12%.
Bitcoin’s contango has failed to breach the 5% neutral threshold, while the price of Bitcoin has held on to support at $29,000 until June 11. Whenever the indicator weakens or turns negative, it's a worrisome bearish red sign, a condition known as backwardation.
To rule out externalities specific to futures instruments, traders must also analyze the Bitcoin options market. For example, a delta skew of 25% indicates when Bitcoin market makers and arbitrageurs are overcharging for upside or downside protection.
In a bullish market, options investors see a higher probability of higher prices, causing the skew indicator to drop below -12%. On the other hand, a general panic in the market would result in a positive skew of 12% or more.
The 30-day delta skew peaked at 36% on June 18, the highest ever recorded and typical of an extremely bearish market. Apparently, the 18% rise in bitcoin prices since bottoming out at $17,580 is enough to restore some confidence to derivatives traders. While the 25% skew indicator is still negative for downside risk, at least it is no longer at levels reflecting extreme risk aversion.
Analysts expect 'maximum losses' ahead
Some indicators suggest that Bitcoin may have bottomed out on June 18, especially after support at $20,000 strengthened. On the other hand, market analyst Mike Alfred made it clear that, in his view, “Bitcoin’s reckoning against the big players is not over yet. They’re going to bring it down to a level that does the most damage to overexposed players like Celsius. "
Until traders better understand the contagion risks from the implosion of the Terra ecosystem, the possible bankruptcy of Celsius, and the liquidity issues facing Three Arrows Capital, the odds are high that the price of Bitcoin will crash again.
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