What is behind the madness in the Bitcoin futures market?

Bitcoin (BTC) price started February 17 at over $ 50k.

Futures and options indicators, on the other hand, do not adapt to this increase and indicate that buyers are over borrowing while option markets remain calm. When both markets are analyzed, an inference can be made as to what caused this dispute.

Option markets remain calm

The 25 percent delta curve represents one of the most important tools when analyzing the options markets. This indicator compares similar buy and sell options side by side.

The indicator turns negative when the put options premium is higher than call options with similar risk levels. The negative curve indicates that downstream protection will be more costly and therefore bullish.

The return of the 25 percent delta curve to positive, on the contrary, gives signals of decline.

25 percent delta curve of Deribit 30-day BTC options. Source: laevitas.ch

A curve indicator between -10 percent (indicating partly upward) and +10 percent (indicating partly downward) is considered normal. A 30-day curve of 10 percent or higher has never been seen over the past three months.

Considering that Bitcoin experienced another 24 percent correction on January 11 and another 19 percent correction 10 days later, these data strengthen expectations for a rise. However, there is no data that options traders are demanding higher premiums for downstream protection.

Futures are alarming

By measuring the cost difference between futures and the spot market, investors can make an inference about the market bullish expectation.

Quarterly futures are typically traded at a 6 to 20 percent annual premium compared to spot exchanges. If this indicator turns negative, it signals danger and indicates a decrease expectation.

On the other hand, a consistently over 20 percent premium indicates that buyers are over indebted and increases the likelihood of huge liquidations and immediate market crashes.

March 2021 BTC futures premium. Source: NYDIG Digital Assets Data

The chart above shows that this indicator bottomed at 1.5 percent on January 27, then rose to 4.5 percent and above with Bitcoin rising above $ 35,000. The futures premium managed to hold above 10 percent annually even in its worst periods, demonstrating the rising expectation of professional investors.

The current level, which is 5.5 percent and corresponds to 50 percent per year, shows that buyers are over indebted. The basis of this problem may be continuous futures, which are mostly used by individual investors.

Funding rate for weekly BTC continuous futures. Source: NYDIG Digital Assets Data

Note that the funding rate has exceeded 2.5 percent weekly, and contracts for March have already covered the 50 percent annual premium.

Therefore, arbitrage investors and market makers agree to pay such high premiums to these contracts while taking short positions in continuous futures and making a profit from the exchange difference.

All of this explains why buyers are over-borrowed in futures markets while options markets remain calm. While institutional customers and whales make up the majority of the options volume, individual investors seem to be at the root of the mismatch in futures markets.

The opinions and views expressed herein are those of the author alone and do not reflect the views of Cointelegraph. Every investment involves risk. Do your own research before making a decision.

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