There has been a growing impact from Bitcoin futures and options market on the price of Bitcoin recently. The liquidations at OKEx and Huobi exchanges have also caused a lot of price swings on Bitcoin.
The recent increase in the role of derivative markets in Bitcoin price fluctuations have made it increasingly important to review some of the key metrics professional traders are using to measure activity in the markets.
For the average or new trader, reviewing futures and options contracts can be very complicated. However, the trader can still benefit from the knowledge of how to properly interpret the futures premium, funding rate, options skew, and put-call ratio.
This is used to measure how expensive longer-term futures contract are to the current spot at traditional markets. It can be the relative reflection of investor optimism, where fixed-calendar futures trade at a smaller premium to regular spot exchanges.
Two-month futures usually trade with a 0.8% to 2.3% premium in a healthy market. A number above this range indicates extreme optimism. The lack of a futures premium indicates bearish.
The past week saw a lot of price fluctuations with the indicator reaching 2% on Nov. 24 and Bitcoin price peaking to $19,434. The premium is currently at 1.1% and although there has been a 14% drop in Bitcoin price, the indicator was above 0.8%. indicators view this as a bullish level and today Bitcoin achieved a high of more than $19,900.
Perpetual Futures Funding Rate
Perpetual contracts which are also called inverse swaps have a fixed rate that is typically charged every eight hours. The funding rates make sure there are no exchange risk imbalances. The leverage can vary even when buyers and sellers open interest is matched.
When the buyers (longs) demand for more leverage, the funding rate goes positive hence they will be the ones to pay the fees. This scenario is mostly true during bull run periods where the demand for longs is higher.
Cases where rates are above 2% per week indicate extreme optimism, with such a level acceptable during market rallies and problematic when BTC is sideways or in a downtrend. In such scenarios, high leverage from buyers present the possibility of large liquidations during surprise price drops.
Despite the recent bull run, the weekly funding rate has stayed below 2% which is an indication that although traders are optimistic, buyers were not overleveraged. Additionally, the indicator held a healthy neutral level even during the $1,400 price drop on Nov.26.
Options are divided into two segments: call (buy) and sell. The call option allows buyers to buy BTC at a fixed price on the expiry date while sellers are obligated to make the sale. The 25% delta skew compares side-by-side equivalent call (buy) and put (sell) options. The skew indicator swifts to a negative range when the protection for price upswings using call options is costlier. The opposite is true where investors are bearish, causing put options to trade at a premium and skew indicators to shift positively.
Fluctuations between -15% (slightly bullish) and +15% (somewhat bearish) are expected since markets can rarely stay flat or near zero. Traders should therefore monitor more extreme situations because they might indicate when market makers are unwilling to take risks on either side.
According to this chart, since Nov. 5, option traders are not willing to take positions exposing themselves against an upside, which is considered a bullish situation.
Options Put-Call Ratio
The overall market sentiment can be measured by the activities going through the call or sell options. Call options are generally used for bullish strategies and sell options for bearish strategies.
A 0.70 put-t0-call ratio shows that sell options open interest lag the more bullish calls by 30%, hence bullish. A 1.20 indicator on the other hand favors put options by 20% which can be bearish. This indicator aggregates the entire BTC options market and all calendar months.
These four metrics have held steady recently especially after the market suffered a pullback that saw BTC price drop to retest $16,200. With the price increasing, investors are excited to see whether BTC will break its all-time high this week.
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