The Bitcoin (BTC) price plunged 19% on August 5, hitting a nearly six-month low of $49,320. The selloff also pushed Bitcoin futures premiums, often seen as a proxy for optimism among derivatives traders, to their lowest levels in three months. Traders are now debating whether Bitcoin prices below $53,000 are a golden opportunity, or whether the risk of another drop to $47,000 is too high.
Bitcoin futures market shows investors are not bullish
To gauge the impact of the recent price crash, we should start by analyzing the Bitcoin futures market. Unlike perpetual contracts, which are usually settled every 8 hours, BTC monthly futures have a long settlement period, which has built-in costs. Sellers typically demand a 5% to 10% annual premium over the regular Bitcoin spot market to compensate for this problem. In short, a premium below 5% is a bearish signal.
The annualized Bitcoin futures premium (the benchmark rate) fell to 5.5% on August 5, its lowest level in three months, and a sharp decline from the previous week when the indicator peaked at 12%. More notably, the futures premium bottomed at 5% on May 2, following a 15% weekly decline in Bitcoin prices from $66,600 to $56,200. In May, Bitcoin prices rebounded 13% in the three days following the crash, but the current situation is quite different.
First, this week’s weekly price crash was much larger, at 29%, and coincided with significant moves in traditional financial markets. The 5-year US Treasury yield fell from 4.08% on July 29 to 3.45% on August 5, an unusual event. In essence, traders are fleeing to the safest assets they know: government bonds and cash positions. Even gold has seen a sharp correction, falling from a high of $2,477 on August 2 to the current $2,385.
To see if the sentiment change is limited to the Bitcoin futures market, we need to look at the demand in the BTC options market. The put-call volume ratio measures the demand between put (sell) and call (buy) options. Periods of uncertainty typically drive up hedging demand, which causes the indicator to approach or exceed the 1.0 threshold in favor of put options.
The Bitcoin options put-call volume ratio reached 0.95 on August 2nd and August 5th, indicating widespread fear. For comparison, the average last week was 0.50, with call options volume up 100%. Before concluding that some in the market were expecting a price crash, we should look at the forced liquidation of BTC futures contracts. Unexpected price movements tend to trigger a chain reaction of position closures due to a lack of margin.
Leverage reduction is a net positive, but sentiment remains weak
According to data, $353 million in leveraged Bitcoin futures long positions were liquidated over the course of two days, the highest in nearly four months. This evidence suggests that traders were not expecting such a strong move. However, it also confirms that some of the selling pressure came from the derivatives markets rather than regular selling in the Bitcoin spot market.
Related: Over $1 Billion Lost in Crypto Liquidations as Global Markets Take a Hit
It is less important to determine the exact reason for the Bitcoin price crash, whether it reflects worsening conditions in the traditional market or excessive leverage in the cryptocurrency market. Even if the Bitcoin market is now low leveraged and excessive optimism has diminished, trader morale is extremely low and it will take time for the market to regain confidence.
Until the premium for Bitcoin futures increases and demand for call options increases, a sustained price recovery above $57,000 is unlikely. Reaching this level would show the strength of Bitcoin’s bullishness, as it would be 18% higher than the August 5 low and consistent with support that has been holding strong for the past six months.
This article does not contain any investment advice or recommendations. All investment and trading moves involve risk, and readers should conduct their own research when making decisions.