Investors fear seeing a 30% drop in Bitcoin prices similar to 2019, but option data suggests that the USD
Earlier today, the price of Bitcoin (BTC) peaked at USD 18.476 after an impressive 35% rally that seems to have started in early September.
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This amazing move was followed by a correction to the USD 17,000, a natural setback. This adjustment led some investors to question whether the current setting resembles the peak of USD 13,850 formed in July 2019.
BTC/USD pair in July 2019.
At that time, there was a 30% drop after a similar-sized rally, and then it took 14 months for Bitcoin to recover to the USD 13,850 level. Coincidentally, there was a large sudden drop right after that local high, but the price finally recovered and stabilized near the USD 12,800 level.
If something similar happened this time, investors would expect a minimum of USD 13,000 for the current cycle. Apart from a sudden drop after a strong rebound, what other indicators mimic the price action of July 2019?
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The first step is to analyze the base indicator of futures, which can be interpreted as investor optimism. The basis is also often referred to as the futures premium and measures the premium of longer-term futures contracts over current spot levels (traditional markets).
Fixed month futures contracts are generally traded at a small premium, indicating that sellers are asking for more money to delay settlement of the contract. In healthy markets, futures must be traded at an annualized premium of 5% or more, this situation is known as contango.
Annualized basis for 3-month Bitcoin futures in July 2019.
There may have been some over-optimism, as the base indicator reached 20% on June 23. However, it remained at very healthy levels throughout the 2019 price correction.
The above graph can be interpreted as an absolute unwillingness to reduce long positions. This move occurred despite a sudden drop of USD 2,000 followed by a 30% correction from the peak.
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Strangely enough, even the 30% drop after the USD 13,850 high did not lower the premium on futures contracts. The decline in the bullish trend usually has a massive impact on the base indicator.
We are moving quickly to the current scenario, and there is not a single case of excessive optimism according to the same metric.
Annualized basis for 3-month Bitcoin futures in November 2020.
The chart above shows that the base indicator quickly fell below 10% just after the peak of USD 18,500. To further differentiate the current price action from that of July 2019, two weeks before the price peak, the futures premium was 0%, a clear sign that investors had bearish sentiment.
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This time, the lowest level during the last two weeks was 7%. This means that investors have maintained positive expectations over the last few months, while in July 2019, the market saw an intense, fast and optimistic race.
Options traders were not as optimistic before the rise
To better analyze current market sentiment, investors should also consider option market spreads. The 25% delta slope indicator will go to the negative side when call options (neutral or bullish) are more expensive than similar put options. This metric generally ranges from -20% to +20% and reflects current market sentiment.
25% delta slope for 3-month Bitcoin options in June 2019
Interestingly, Bitcoin experienced an 80% bull run in the three weeks prior to the peak of $13,850, but the options market didn’t seem to be ready for this. At the time, upward protection using call options was trading at the same premium as downward put options.
Awaiting a sharp change in the price of Bitcoin, as the volatility of BTC has fallen to a 16-month low