Bitcoin derivatives favor the bulls, but data shows that professional traders decided to open short positions when BTC rose above USD 12,000.
As Bitcoin (BTC) breaks the $12,000 resistance, the derivatives markets are flirting with overly bullish sentiment. The futures base and the 25% delta option bias reached the same levels seen on October 12th when BTC briefly reached USD 11,700 but was unable to maintain momentum.
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What differentiates the current situation from the one seen nine days ago are the positions of professional cryptomoney traders. On October 12, these traders increased their long positions, but during the recent move to USD 12,000, these same professional traders opened short positions.
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Despite this change in sentiment, traders should not automatically conclude that today’s move will become a failure based solely on the long to short indicator. For beginners, there is no way to know for sure how the major traders will position themselves outside the exchange.
For this reason, derivatives pricing is a more accurate way to evaluate how bullish or bearish professional traders can be. This indicator focuses on actual market conditions, while both fear and greed and the buy-sell relationship are retrospective.
Futures markets tend to trade at a slight premium to regular spot exchanges. This event is not exclusive to the cryptomarket, but rather a derivative effect.
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The premium (or basis) for futures contracts should be between 5% and 10% annualized rate in healthy markets. Figures above this range denote excessive optimism, as traders are betting on much higher prices. In the opposite situation, a negative futures contract premium indicates bearish sentiment.
Annualized BTC 3-month futures contract premium Source: Skew
The graph above shows how the base indicator has been flirting with overly optimistic levels, similar to what happened on October 12.
Traders should not confuse optimism with leverage, as a positive funding rate on perpetual contracts is also needed to confirm this thesis.
The financing rate for perpetual futures is settled every 8 hours on most exchanges, and a fee is paid from long (buyers) to short when the financing rate is positive. This situation would be the defining characteristic of over-leveraged buyers, but that has not been the case so far.
Bitcoin Perpetual Contract Finance Rate.
The data above shows how volatile the financing rate has been, although we have not seen sustained financing periods. The standard measurement for this indicator is 8 hours. Therefore, a rate of 0.05% is equivalent to 1% per week. The opposite is true for a negative financing rate when it is the short people who pay for it.
As far as the Bitcoin options market is concerned, there was a similar movement when the 25% delta bias indicator entered the bullish territory with excess confidence. A negative bias indicates that call options cost more than similar put options, indicating a bullish sentiment. On the other hand, a positive bias suggests a downward trend.
25% of the delta for 3-month Bitcoin options
Notice how close the bias indicator is to its lowest levels in 6 months, indicating traders‘ optimism. This situation is the same seen on October 12th, when BTC gained 10% in 4 days. Although there’s nothing to stop the bias indicator from staying at the current level for long periods of time, it’s unlikely in the history of Bitcoin.
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After reviewing the indicators of the derivatives market, we could conclude that professional traders are leaning upwards when opening long positions above USD 12,000. Except that the data provided by exchanges on the averages of professional traders‘ net long and short positioning shows that this is not the case.