BTC options data suggests that the Bitcoin price rally still has some stretch, even with broader economic concerns rising and the possibility of a brief pause in the cryptocurrency market rally.
This week, Bitcoin (BTC) hit its 2023 high at $23,100, and the move followed a notable rally in traditional markets, most notably the tech-heavy Nasdaq Composite Index, which gained 2.9% on Jan. 20. .
Economic data continues to fuel investor hopes that the US Federal Reserve will reduce the pace and duration of interest rate hikes. For example, existing home sales fell 1.5% in December, the 11th consecutive decline after high US mortgage rates severely affected demand.
On January 20, Google announced the layoff of 12,000 workers, more than 6% of its global workforce. Bad news continues to fuel buying activity in risky assets, but Dubravko Lakos-Bujas, JPMorgan’s chief US equity strategist, expects weaker earnings forecasts to “put downward pressure” on the market.
Fears of a recession increased on January 20, after Federal Reserve Governor Christopher Waller said a mild recession should be tolerated if it would bring inflation down.
Some analysts have attributed the Bitcoin gains to Digital Currency Group filing for Chapter 11 bankruptcy protection, allowing Genesis Capital to reorganize its debts and business activities. But more importantly, the move lessens the risk of a forced sale of Grayscale Investments’ assets, including Grayscale’s $13.3 billion BTC trust fund.
Let’s look at derivatives metrics to better understand how professional traders are positioning themselves in current market conditions.
Margin long Bitcoin positions fell after rally to $21,000
Margin markets offer insight into how professional traders are positioned by allowing investors to borrow cryptocurrencies to leverage their positions.
For example, exposure can be increased by borrowing stablecoins to buy Bitcoin. 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 does not always match.
The chart above shows that OKX traders’ margin lending ratio increased from January 12 to January 16, indicating that professional traders increased their leverage as Bitcoin gained 18%.
However, the indicator reversed when excessive leverage, 35 times higher for buying activity on January 16, eased back to neutral to bullish on January 20.
Currently at 15, the metric favors stablecoin lending by a wide margin and indicates that shorts are not confident in opening bearish leveraged positions.
Even so, this data does not explain whether professional traders became less bullish or decided to reduce their leverage by depositing additional margin. Therefore, you have to analyze the options markets to see if sentiment has changed.
Options Traders Neutral Despite Recent Rally
The 25% slope of the options delta is a telltale sign when arbitrage desks and market makers are overloading protection to the upside or downside.
The indicator compares similar put and call options and turns positive when fear prevails because the protection premium for put options is higher than for risky call options.
In short, 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 options’ delta 25% slope hit its lowest level in more than 12 months on January 15. At last, options traders were paying a premium for bullish strategies rather than the other way around.
Currently at minus 2%, the delta indicates that investors are pricing similar probabilities for bullish and bearish cases, which is somewhat less optimistic than expected considering the recent rally towards $22,000.
Derivatives data puts bulls in check as stablecoin margin buyers significantly reduced their leverage and options markets are pricing similar risks for both sides. On the other hand, the bears have not found a level where they feel comfortable going short by borrowing Bitcoin in the margin markets.
Traditional markets continue to play a crucial role in setting the trend, but Bitcoin bulls have no reason to fear as long as derivatives metrics remain healthy.
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This article does not contain investment advice or recommendations. All investments and trades carry risk, so readers should do their own research when making a decision.