Bitcoin (BTC) has not been able to break out of the descending channel in which it has already been stuck for 26 years. Investors are uncomfortable holding volatile assets after the US Federal Reserve pledged to cut its $9 trillion balance sheet.
While inflation is soaring around the world, the first signs of an economic slowdown are manifested by the drop in retail sales in the United Kingdom (1.4% in March). Additionally, Japan’s industrial production fell 1.7% in March. Finally, the gross domestic product of the United States fell by 1.4% in the first quarter of 2022.
This bearish macroeconomic outlook may partly explain why Bitcoin has been in a downtrend since early April. However, you have to look at how professional traders and derivatives markets position themselves to get some good indicators.
To understand if the current downtrend reflects the stance of professional traders, look at the Bitcoin futures contract premium, which is also known as “basis.”
Unlike a perpetual contract, these fixed-date futures contracts do not have a funding fee, so their price will differ greatly from regular spot exchanges. A bearish market sentiment causes the three-month futures contract to trade at an annualized premium of 5% or less.
On the other hand, in a neutral market a basis of between 5% and 12% should be seen, which would reflect the unwillingness of traders to lock up Bitcoin cheaply until the trade is settled.
The chart above shows that the Bitcoin futures premium has been below 5% since April 6, indicating that futures traders are reluctant to open long leveraged (buy) positions.
Options Traders Still in the “Fear” Zone
To exclude externalities specific to futures instruments, traders should look at the options markets as well. The 25% skew of the option delta compares equivalent call and put options. The indicator will turn positive when “fear” prevails because the protection premium for put options is higher than for call options.
The opposite occurs when market makers are bullish, causing the 25% slope of the options delta to shift into the negative zone. Readings between -8% and +8% are usually considered neutral.
The chart above shows that Bitcoin options traders have been signaling “fear” since April 8, just as BTC broke below $42,500 after falling 10% in four days. Of course, said metric could be reflecting BTC’s 16% negative price return in the last month, so it’s not exactly a surprise.
Margin markets remain bullish
Margin trading allows investors to borrow cryptocurrencies and leverage their trading position, thus potentially increasing profits. For example, a trader can buy crypto by borrowing Tether (USDT) to increase their exposure.
On the other hand, Bitcoin borrowers can only short the cryptocurrency as they bet on its price falling. Unlike futures contracts, the balance between long and short positions in the margin markets is not always equal.
The chart above shows that traders have recently borrowed more Bitcoin, as the ratio has decreased from 20 on April 30 to 12.5 today. The higher the indicator, the more confident professional traders are about the Bitcoin price.
Despite some additional Bitcoin lending activity aimed at betting on the price decline, margin traders remain mostly bullish based on the USDT vs. BTC lending ratio.
Bitcoin traders fear a further correction as macroeconomic indicators deteriorate as investors expect a potential impact of the crisis on riskier markets. However, there are no signs of (negative) leveraged short bets using margin or futures, which means sellers lack conviction at $38,000 today.
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