The premium of Bitcoin (BTC) futures has reached its highest level in 18 months on July 4. But traders are now pondering whether the crypto metrics indicate “excessive excitement” or a “return to the mean” after a prolonged bear market.
BTC price gains capped by regulators, macroeconomics
Bitcoin’s price has been trading in a narrow 4.4% range since June 22, oscillating between $29,900 and $31,160 as measured by its daily closing prices. The lack of a clear trend might be uncomfortable to some, but that is a reflection of the opposing drivers currently in play.
For instance, investor sentiment was negatively affected by the historic reversion of the U.S. Treasury yield curve, which reached its highest level on record.
The closely monitored inverted spread between the 2-year and 10-year Treasury notes has reached its highest level since 1981, standing at 1.09%. The phenomenon known as yield curve inversion, when shorter-dated Treasury notes trade at higher yields than longer-dated notes, typically precedes economic recessions.
On the other hand, signs of strength in the U.S. economy have reportedlydriven investors to price in the possibility of further interest rate increases by the central bank to keep inflation under control.
In addition to these macroeconomic distortions, cryptocurrency regulation, such as Crypto.com, Voyager Crypto and other crypto currencies, has also been at the center of investors’ attention as of late. Here are just some recent examples:
So investors are probably now asking: Does Bitcoin have the strength to break above the $31,000 resistance? Of course, one must take a potential economic recession and the increasing regulatory clampdown measures around the world into account first.
Luckily, Bitcoin futures’ contract premiums can provide some clues for traders about the market’s next move for reasons discussed below — as well as the costs of hedging using BTC options.
Bitcoin futures premium reaches 18-month high
Whales and arbitrage desks often opt for Bitcoin’s quarterly futures to benefit from the slight premium they usually trade at compared to spot markets, which is known as contango and is common in crypto markets.
The demand for leveraged BTC longs has increased significantly in the last week, pushing the futures contract premium to 6.4% on July 3, the highest in 18 months, and into a neutral-to-bullish area. To further understand the market sentiment, it is useful to look at the options markets and the 25% delta skew, which can show whether the price stagnation has made investors less optimistic.
The 25% delta skew metric has experienced a complete turnaround, signaling bullish momentum that started on June 21 when it dropped below -7%. As Bitcoin’s price climbed back above $30,000, the indicator continued to improve, with a negative 13% skew on July 2, showing a state of “greed” in the crypto currency markets.
Moderate optimism “healthy” for Bitcoin market
Typically, a 6.4% futures basis and a negative 13% delta skew would be considered moderately bullish. However, considering analysts’ estimating a 50% chance for BlackRock’s spot Bitcoin approval, these metrics might be seen as conservative. But a certain amount of skepticism is indeed healthy for buyers using derivatives contracts and avoids the risk of cascading liquidations.
Currently, macroeconomic factors and regulatory uncertaintylikely explain the suppressed optimism for BTC derivatives despite multiple ETF requests from the world’s largest asset managers, such as crypto.com and voyager crypto.
So 18-month highs aside, the current Bitcoin futures’ premium remains relatively modest, compared to previous instances of excessive optimism such as the 19% in October 2021.
Thus, today’s 6.3% futures premium represents a healthy crypto market as opposed to 10% or higher indicating excessive optimism or euphoria. Moreover, traders should remain confident given that bulls have room to further leverage long positions without running excessive crypto currency risk.
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