Bitcoin (BTC) price continues to trade below its 2023 peak, a sign that investors may have underestimated the strength of the $44,000 resistance. Even if the BTC price is below $42,000, that does not necessarily mean that reaching $50,000 and above is no longer possible. In fact, the opposite seems to be the case. Looking at Bitcoin derivatives metrics, it is clear that traders ignored the 6.9% decline and remained optimistic. However, is this optimism enough to justify further increases?
The December 11 liquidation of $127 million in leveraged long Bitcoin futures may seem significant in absolute terms, but it represents less than 1% of total open interest – the value of all outstanding contracts. Still, there is no denying that the liquidation machine triggered a 7% correction in less than 20 minutes.
Bitcoin's crash was accelerated, at least in the short term, by derivatives
On the one hand, one could argue that derivatives markets have played a crucial role in the recent negative price movement. However, this analysis overlooks the fact that after hitting a low of $40,200 on December 11, Bitcoin price rose 4.2% in the following six hours of trading. Essentially, the effects of violent liquidation orders had long since dissipated, disproving the notion of a crash caused solely by futures markets.
To determine whether Bitcoin whales and market makers are still bullish, traders should examine the Bitcoin futures premium, also known as the base interest rate. Professional traders prefer monthly contracts due to their fixed financing rate. In neutral markets, these instruments trade at a premium of 5 to 10% to reflect their extended settlement time.
Annualized premium for Bitcoin 2-month futures. Source: Laevitas.ch
Data shows that despite the 9% intraday price decline on December 11, the BTC futures premium barely fluctuated as it consistently remained above the neutral to bullish 10% threshold. Had there been significant excess demand for shorts, the metric would have at least fallen into the neutral range of 5% to 10%.
Traders should also analyze the options markets to determine whether the recent correction has dampened investor optimism. The 25% delta skew is a powerful indicator that arbitrage desks and market makers are charging too much for upside or downside protection.
When traders expect Bitcoin price to fall, the skew metric will rise above 7%, and periods of excitement tend to result in a negative 7% skew.
Bitcoin 30 Day Options 25% Delta Skew. Source: Laevitas
As shown above, BTC options offset has been neutral since December 5th, indicating balanced costs for both call (buy) and put (sell) options. It's not as bullish as in previous weeks when put options traded at a 10% discount, but it at least shows resilience after the 6.1% correction since December 10th.
Retail traders remained neutral to bullish despite Bitcoin's fluctuations
Now that we have covered two of the most relevant indicators of institutional flow, it is worth analyzing whether retail traders using leverage have influenced the price movement. Perpetual contracts, also called inverse swaps, include an embedded interest rate that is typically recalculated every eight hours.
Bitcoin Perpetual Futures 8 Hour Funding Rate. Source: Coinglass
A positive funding rate indicates increased demand for leverage in long positions. Note that the data shows a slight increase between December 8th and 10th to 0.045%, which is 0.9% per week, which is neither significant nor burdensome for most traders to hold their positions.
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Such data is quite encouraging considering that the price of Bitcoin has increased by 52% since October. This suggests that excessive retail long leverage did not lead to the rally and subsequent liquidations.
Whatever caused the rise to $44,700 and the subsequent correction to the current $41,300 appears to be primarily spot market driven. This does not necessarily mean that the bottom has been reached, but it significantly reduces the likelihood of a cascade unraveling due to the excessive optimism associated with the anticipation of a spot exchange-traded fund (ETF) approval.
Essentially, this is good news for Bitcoin bulls as derivatives suggest that the positive momentum has not faded despite the price correction.
This article does not contain any investment advice or recommendations. Every investment and trading activity involves risks and readers should conduct their own research when making their decision.
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