Bitcoin (BTC) price continues to trade below its 2023 high, a sign that investors may have underestimated the power of $44,000 resistance. Just because the price of BTC is trading below $42,000 does not necessarily mean that reaching above $50,000 is no longer possible. In fact, the opposite seems more likely to happen. Looking at Bitcoin derivatives indicators, it is clear that traders have ignored the 6.9% drop and remained optimistic. But is this optimism enough to justify further gains?
The liquidation of $127 million in leveraged Bitcoin buy futures on December 11 may seem significant in absolute terms, but it represents less than 1% of total open interest, or the value of all open contracts. Nonetheless, it is undeniable that the clearing engine triggered a 7% correction in less than 20 minutes.
Bitcoin’s collapse was accelerated, at least in the short term, by derivatives.
On the one hand, it could be argued that the derivatives market played a decisive role in recent negative price movements. However, this analysis overlooks the fact that after hitting a low of $40,200 on December 11, the price of Bitcoin rose 4.2% over the next six trading hours. Essentially, the impact of liquidation orders has long since dissipated, disproving the notion that the crash was caused solely by the futures market.
To determine if Bitcoin whales and market makers remain bullish, traders should examine Bitcoin futures premiums, also known as base rates. Professional traders prefer monthly contracts due to the fixed funding rates. In neutral markets, these instruments trade at a premium of 5-10%, taking into account the extended settlement period.
Data shows that BTC futures premiums were little changed as they remained above the 10% neutral-bullish threshold overall despite a 9% intraday price decline on December 11. If there had been significant excess demand for shorts, the indicator would have fallen into at least the neutral 5% to 10% range.
Traders should also analyze the options market to determine whether recent corrections have dampened investor optimism. The 25% delta skew is an indicator that arbitrage desks and market makers are overcharging for upside or downside protection.
When traders expect Bitcoin price to fall, the skewness indicator rises above 7%, and periods of excitement tend to see negative 7% skewness.
As you can see above, BTC options skew has been neutral since December 5, indicating that the costs of both call (buy) and put (sell) options are balanced. While not as bullish as previous weeks when puts were trading at a 10% discount, it at least shows some resilience following the 6.1% correction since December 10th.
Retail traders remained neutral to bullish despite Bitcoin’s volatility.
After covering the two most relevant indicators of institutional flows, it is time to analyze whether retail traders using leverage have influenced the price action. Perpetual contracts, also known as inverse swaps, typically include an implied interest rate that is recalculated every eight hours.
A positive funding ratio means increased demand for leverage in long positions. The data shows a modest increase of 0.045% (equivalent to 0.9% per share) between December 8 and December 10. This is neither important nor burdensome for most traders to maintain a position.
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Considering that the price of Bitcoin has surged 52% since October, this data is quite sound. This means that excessive retail leverage buying did not drive the rally and subsequent liquidation.
What sparked the rally to $44,700 and the current correction to $41,300 appears to have been driven primarily by the spot market. This doesn’t necessarily mean the bottom has been reached, but it significantly reduces the likelihood of cascading liquidations due to excessive optimism tied to expectations of the approval of cash exchange-traded funds (ETFs).
Essentially, this is good news for Bitcoin bulls. Derivatives indicate that positive momentum has not disappeared despite the price correction.
This article does not contain investment advice or recommendations. All investment and trading activities involve risk and readers should conduct their own research when making any decisions.