Bitcoin (BTC) has been trading near $16,500 since Nov. 23, recovering from a drop to $15,500 when investors feared the impending insolvency of Genesis Global, a trending and cryptocurrency lending company. Genesis stated on November 16 that it would “temporarily suspend repayments and new loan issuances from its business.”
After causing initial chaos in the markets, the company denied speculation of an “imminent” bankruptcy on November 22, although it confirmed difficulties in raising money. Most importantly, Genesis’s parent company, Digital Currency Group (DCG), owns Grayscale, the asset manager behind the Grayscale Bitcoin Trust, which owns about 633,360 BTC.
Contagion risks from the FTX/Alameda Research implosion continue to put negative pressure on markets, but the industry is working to improve transparency and insolvency risks. For example, on Nov. 24, crypto derivatives exchange Bybit launched a $100 million fund to help market makers and high-frequency trading institutions experiencing financial or operational difficulties.
Most recently, on Nov. 25, Binance published a Merkle tree-backed proof of funds for its Bitcoin deposits. Additionally, the exchange outlined how users can use the mechanism to verify their holdings. There is no doubt that centralized institutions must adopt mechanisms of transparency and insurance to restore investor confidence.
However, one must first analyze the Bitcoin derivatives markets to fully understand how professional traders are digesting this news.
Futures market discount has improved slightly, but is still not bullish
Fixed-month futures contracts often trade at a slight premium to typical spot markets because sellers demand more money to retain settlement longer. This situation, technically known as contango, is not exclusive to crypto assets.
In healthy markets, futures should trade at an annualized premium of between 4% and 8%, which is enough to offset risks plus the cost of capital. The opposite, when the demand for bearish bets is exceptionally high, causes a discount in the futures markets, known as backwardation.
Given the above data, it is clear that derivatives traders turned bearish on Nov. 9, as the Bitcoin futures premium turned negative. However, according to futures markets, the drop to $15,500 on November 21 was not enough to instill additional demand for leveraged short positions.
Options markets confirm the downtrend
Traders should analyze the options markets to understand if Bitcoin will retest the $15,500 support. The 25% slope of the options delta is a telltale sign when arbitrage desks and market makers are overcharging for upside or downside protection.
The indicator compares similar call and put options and turns positive when fear prevails because the protection premium for put options is higher than for risk options.
Simply put, the bias metric will move above +10% if traders fear a Bitcoin price drop. On the other hand, the generalized hype reflects a slope of -10%.
As shown above, the 25% delta slope has been above the 10% threshold since November 9, indicating that options traders are pricing in a higher risk of unexpected price declines. Currently at 18%, it indicates that investors are fearful and reflects a lack of interest in offering downside protection.
A surprise rise will probably make more of an impact
Given that both the Bitcoin futures and options markets are currently pricing in higher odds for a downside, there is no reason to believe that an eventual pullback to the $15,500 low would cause massive selloffs.
Furthermore, the slight reduction in the futures discount shows that the bears lack the confidence to open leveraged short positions at current price levels. Although Bitcoin derivatives data remains bearish, the surprise of an eventual bull run to $18,000 is likely to wreak more havoc. But for now, the bears are still in control based on BTC futures and options data.
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