Bitcoin fell 5.3% between October 9 and October 10, reaching a three-week low of $58,900.
The market correction began after the U.S. reported stronger-than-expected consumer inflation data, suggesting traders are concerned the Federal Reserve has little incentive to continue cutting interest rates in the near future.
Bitcoin (BTC)’s reaction reflects investors’ view that the likelihood of a recession has increased. The U.S. Bureau of Labor Statistics announced that the Consumer Price Index (CPI) rose 0.2% in September compared to the previous month, sparking concerns about ‘stagflation’. In this scenario, prices continue to rise despite the recession, which runs counter to the central bank’s goal of promoting growth while suppressing inflation.
Meanwhile, data released on October 10 showed that unemployment claims in the United States rose to their highest level in 14 months. Initial applications for unemployment benefits rose unexpectedly, reaching a seasonally adjusted 258,000 by October 5. The widespread negative impact of Boeing’s union strike on the economy remains a major concern for policymakers.
There is no guarantee that the price of Bitcoin will be negatively affected if the U.S. Federal Reserve (Fed) adopts tighter monetary policy, but investors are concerned about a stock market correction due to the overheating economy. As a result, trader morale is weakened considering that the price correlation between the S&P 500 and Bitcoin is currently as high as 88%.
In this context, it is natural to expect Bitcoin traders to become less optimistic about near-term prices. Especially after two consecutive days of outflows from US spot Bitcoin ETFs. These products saw net outflows of $59 million between Oct. 8 and Oct. 9, reversing the trend from the previous two trading days, according to data from Farside Investors.
Bitcoin’s bearish momentum accelerated following reports that market maker Cumberland DRW was being sued by the U.S. Securities and Exchange Commission for allegedly acting as an ‘unregistered dealer’ in cryptocurrency trading. The Chicago-based company profited from the sale of cryptocurrency assets “similar to the sale of commodities,” according to a statement from the regulator.
Bitcoin derivatives reflect short-term selling pressure.
Regardless of whether these claims hold up in court, traders tend to seek protection when fear and uncertainty arise. When Bitcoin fell below $59,000, primary derivatives indicators were bearish, suggesting reduced demand for leveraged buying (long) activity.
In a neutral market, the Bitcoin futures premium, which measures the difference between the monthly contract and the spot price on a common exchange, should reflect a 5-10% annual basis (basis) to compensate for the long settlement period.
On October 10, the Bitcoin benchmark interest rate fell below the neutral threshold of 5% for the first time in over two months. More importantly, when this indicator turned bearish on August 5, Bitcoin fell 24.6% in three days. Therefore, recent changes in BTC futures indicators indicate a major shift in trader sentiment.
Traders should also analyze the options market to understand the impact of recent Bitcoin price movements. The 25% delta skew indicates when arbitrage desks and market makers overcharge for upside or downside protection. When traders expect Bitcoin price to fall, the skew metric tends to rise above 7%. Conversely, during periods of excitement it tends to be negative 7%.
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The 25% skew in Bitcoin options remained close to zero, indicating that whales and market makers have not changed their short-term risk-reward perceptions. As a result, the sharp decline in BTC basis may be temporary, suggesting that a few large players may have unexpectedly exited their leveraged long positions. Ultimately, derivatives traders do not anticipate an imminent Bitcoin price decline.
This article is written for general information purposes and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.