Bitcoin (BTC) has a long history of setting local highs when expected market events occur. The recent launch of the Bitcoin exchange-traded fund (ETF) on October 19 was no different, leading to a 53% monthly rally to an all-time high of $ 67,000.
Now that the price has briefly dipped below $ 60,000, investors are trying to understand whether the 10% correction was healthy short-term profit-taking or the end of the bull run. To determine this, traders need to analyze previous BTC price activity to assess possible similarities.
The graphic above represents the day a New York Times headline announced that “Bitcoin Gets a Modest Wink from China’s Central Bank” in November 2013. At the time, Yi Gang, deputy governor of the People’s Bank of China (POBC) , said that people could freely participate in the Bitcoin market. He even mentioned a personal opinion that suggested a long-term constructive outlook on the digital currency.
It is also worth mentioning that this favorable media coverage on Chinese state television aired on October 28, showing the world’s first Bitcoin ATM in Vancouver.
Bearish events can also be anticipated
Bearish examples can also be found throughout the 12 years of Bitcoin price action. For example, the Chinese ban in April 2014 marked a 5-month price low.
On April 10, 2014, Huobi and BTC Trade, the two largest cryptocurrency exchanges in China, said that their business accounts with certain domestic banks would be closed within a week. Once again, rumors had been circulating since March of the same year, and this was fueled by a note from the Chinese media, Caixin.
Other more recent developments were the CME Bitcoin futures launch on December 19, 2017, which preceded the infamous all-time high of $ 20,000 by one day. Another event that marked a local high was Coinbase’s IPO on the Nasdaq, when the price of Bitcoin hit $ 64,900. Both events are indicated in the following graph:
Note that all of the events mentioned were highly anticipated by the market, although some did not have an exact announcement date. For example, the initial trading session of the Bitcoin futures-based ETF on October 19 was preceded by the statement by SEC Chairman Gary Gensler on August 3 that the regulator would be open to accept an application. of BTC ETFs using CME derivative instruments.
Investors may have previously positioned themselves prior to the debut of the ProShares Bitcoin Strategy ETF and a look at the BTC derivatives markets could provide more information on this.
The futures premium, also known as the base rate, measures the price difference between the prices of futures contracts and the regular spot market. Quarterly futures are the preferred instruments of the whales and the arbitration tables. Although they may seem complicated to retail traders due to their settlement date and the difference in prices with the spot markets, their most significant advantage is the absence of a fluctuating financing rate.
Some analysts have pointed to the “return of contango” after the base rate reached 17%, the highest level in 5 months.
– Dylan LeClair (@DylanLeClair_) October 20, 2021
In a normal situation, futures markets of any type (soybeans, S&P 500, WTIl) will trade at a price slightly higher than the spot market. This is mainly due to the fact that the investor has to wait until the expiration of the contract to collect, so there is an opportunity cost and this gives rise to the premium.
Suppose someone conducts arbitrage operations, with the objective of maximizing funds held in dollars. This trader could buy a stablecoin and get a 12% annualized return using decentralized finance protocols (DeFi) or centralized cryptocurrency lending services. A 12% premium in the Bitcoin futures market should be considered a “neutral” rate for a market maker.
Excluding the short-lived spike of 20% on October 21, the base rate remained below 17% after a 50% rally so far this month. For comparison, on the eve of the Coinbase share launch, the futures premium shot up to 49%. Therefore, those who describe the current scenario as overly optimistic are wrong.
Liquidation risks were not “imminent” either.
When buyers are extremely confident and accept a high premium to leverage using futures contracts, a 10-15% price drop could trigger cascading liquidations. However, the mere presence of an annualized premium of 40% or more does not necessarily translate into an imminent downside risk because buyers can add margin to keep their positions open.
As the leading derivatives metric shows, a 10% drop from the all-time high of $ 67,000 on October 20 was not enough to provoke any signs of concern from professional traders as the base rate remained at a healthy level. 12%.
The views and opinions expressed here are solely those of the Author and do not necessarily reflect the views of Cointelegraph.com. Each investment and commercial movement involves risks, you must do your own research when making a decision.