Bitcoin (BTC) lost support at $28,000 on June 12 following worsening macroeconomic conditions. The yield on the 2-year US Treasury bond closed on June 10 at 3.10%, its highest level since December 2007. This shows that traders are demanding higher rates to hold their debt instruments and expect that inflation remains a persistent challenge.
Louis S. Barnes, head of loans at Cherry Creek, said that while the United States was experiencing its highest inflation in 40 years, the mortgage-backed securities (MBS) markets had zero buyers. Barnes added:
“Stocks are down 2% today [10 de junio]but they would go down much more if you take into account what a total unemployment of housing will entail”.
Leverage use of MicroStrategy and Celsius sets off alarm bells
The sale of Bitcoin is adding more pressure to the cryptocurrency market and several media outlets are discussing whether Nasdaq-listed US business intelligence and analytics firm MicroStrategy and its $205 million Bitcoin-backed loan with Silvergate Bank will will add to the current collapse of cryptocurrencies. The interest-only loan was issued on March 29, 2022, and is secured by Bitcoin, which is held in a mutually authorized custodian account.
As stated in Microstrategy’s earnings report by CFO Phong Le on May 3, if Bitcoin crashed to $21,000, an additional amount of margin would be required. However, on May 10, Michael Saylor clarified that the entire 115,109 BTC position could be compromised, reducing the liquidation to $3,562.
Lastly, cryptocurrency betting and lending platform Celsius suspended all withdrawals from the network on June 13. Insolvency speculation quickly arose as the project moved massive amounts of wBTC and Ether (ETH) to avoid liquidation on Aave (AAVE), a popular staking and lending platform.
Just realized people with open borrows at low collateral ratios on Celsius are having to choose between getting liquidated due to market crash or depositing more collateral into a service that has frozen withdrawals and is potentially insolvent.
Woof.
— Nick Neuman (, ) (@Nneuman) June 13, 2022
I just realized that people with open loans with low collateral ratios in Celsius are having to choose between being liquidated due to the market crash or putting up more collateral with a service that has frozen withdrawals and is potentially insolvent.
Celsius reported that it had exceeded $20 billion in assets under management in August 2021, which ideally was more than enough to trigger a catastrophic scenario.. Although there is no way of determining how this liquidity crisis will play out, the event caught Bitcoin investors at the worst possible time.
Bitcoin Futures Metrics Near Bearish Territory
The Bitcoin futures market premium, the main metric for derivatives, briefly moved into the negative zone on June 13. The metric compares long-term futures contracts and the traditional spot market price.
These fixed-calendar contracts typically trade at a slight premium, indicating sellers are asking for more money to hold settlement longer. Consequently, three-month futures should trade at an annualized premium of between 4% and 10% in healthy markets, a situation known as contango.
When that indicator fades or turns negative (backwardation), it is an alarming red flag because it indicates bearish sentiment is present.
Although the futures premium had already been below the 4% threshold for the last nine weeks, it managed to maintain a subdued premium through June 13. Although the current 1% premium may seem optimistic, it is the lowest level since April 30 and stands on the verge of a general bearish sentiment.
An unhealthy derivatives market is an ominous sign
Traders should analyze the price of Bitcoin options to further verify that the structure of the cryptocurrency market has deteriorated. For example, the 25% delta deviation compares similar call and put options. This metric will turn positive when fear prevails, because the premium for protective put options is higher than for similarly risky call options.
The opposite occurs when greed prevails, causing the 25% delta slope indicator to shift into the negative zone.
Readings between negative 8% and positive 8% are usually considered neutral, but the peak of 26.6 on June 13 was the highest reading ever recorded. This aversion to pricing downside risks is unusual even for March 2020, when oil futures plunged to the downside for the first time ever and Bitcoin plunged below $4,000.
The main message from the Bitcoin derivatives markets is that professional traders are unwilling to add leverage long positions despite the extremely low cost. Furthermore, the absurd price gap of put options shows that the June 13 crash to $22,600 caught arbitrage desks and market markers by surprise.
For those looking to “buy the dip” or “catch a falling knife”, a clear bottom will only form when derivatives metrics imply that the market structure has improved. That will require the BTC futures premium to reset to the 4% level and options markets to find a more balanced risk assessment as the 25% delta bias returns to 10% or lower.
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