The cryptocurrency market recently witnessed events that were expected to bring about a huge negative price impact, however, Bitcoin (BTC) traded near $37,000 on Nov. 22 — essentially unchanged from three days earlier.
This outcome was unexpected in light of Binance’s agreement with the United States government on Nov. 21 for breaching laws related to money laundering and terror financing.
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Bearish news has had limited impact on Bitcoin price
Analysis of Bitcoin derivatives, rather than just the current price levels, could reveal whether investors have become more risk-averse in response to recent events. On Nov. 14, the U.S. government filed indictments against Binance and its co-founder Changpeng “CZ” Zhao, which were unsealed on Nov. 21. CZ stepped away from Binance management as part of the deal, with penalties totaling over $4 billion, including fines imposed on him personally. Although Bitcoin’s price momentarily dropped to $35,600, only $50 million in BTC leveraged long futures contracts were sold.
On Nov. 20, the United States Securities and Exchange Commission (SEC) sued crypto exchange Kraken for allegedly commingling customer funds and not registering with the regulator as a securities broker, dealer and clearing agency. Kraken responded that the SEC’s commingling accusations were related to fees the exchange had earned.
Mt. Gox, a now-defunct Bitcoin exchange that lost 850,000 BTC to a hack in 2014, also made headlines. Nobuaki Kobayashi, the Mt. Gox trustee, announced on Nov. 21 the redemption of $47 million in trust assets and plans to start the first cash repayments to creditors in 2023. Although there was no information regarding the sale of Bitcoin assets, investors speculated that this final milestone is closer than ever.
Prior to the indictment, many traders and analysts had predicted a crypto market crash if Binance were charged by the DOJ. For instance, McKenna foresaw the indictment and also suggested that the ongoing Bitcoin spot exchange-traded (ETF) fund applications would be denied by the SEC. Surprisingly, Binance becoming compliant with regulations may actually increase the odds of a spot ETF approval, as it weakens the SEC’s argument for previous denials, namely the excessive volume market share on unregulated exchanges.
No concrete developments have emerged from the spot Bitcoin ETF in relation to recent regulatory actions, but the amendments to multiple proposals suggest a productive discussion with the SEC.
Bitcoin derivatives show resilience
To determine if the resilience of the Bitcoin price corresponds to the risk assessment of professional investors, one must analyze the BTC futures and options metrics. As an example, traders may have rushed to hedge their positions, which does not affect the spot markets but has a significant impact on the BTC futures premium and options pricing.
The price of Bitcoin monthly futures contracts usually differs from regular spot exchanges since participants require more money to postpone the settlement. This is not exclusive to cryptocurrencies, and in a neutral market, it should be close to an annualized 5% rate.
It is worth noting that Bitcoin futures currently have an 8% premium, which indicates a strong demand for long leverage, but not excessive. This level is lower than the 11.5% seen in mid-November, but it is quite positive given the recent regulatory news.
To determine if Bitcoin derivatives have not experienced a large influx of hedging operations, one needs to analyze the BTC options markets as well. The 25% delta skew is a telling sign of when arbitrage desks and market makers overcharge for upside or downside protection.
When traders anticipate a decrease in the Bitcoin price, the delta 25% skew tends to rise above 7%, while periods of enthusiasm usually see it drop below negative 7%.
As shown above, the 25% delta skew of options indicates optimism for the last four weeks, as put (sell) options have been trading at a discount compared to similar call (buy) options. More importantly, recent news has not changed the appetite of professional traders for hedging strategies.
In general, there is no doubt that the impact of regulatory actions and the potential sales pressure from Mt. Gox found the market in a great mood, taking into account the derivatives indicators.
In addition, the liquidation of $70 million leveraged BTC longs reduced the pressure from future negative price movements, which means that even if the price falls to $35,000, there is no indication of excessive optimism.
Since the final round of ETF decisions is scheduled for January and February, there is little incentive for Bitcoin bears to put pressure on the market while negative news has had no effect. Ultimately, the path to $40,000 becomes more certain.
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