Bitcoin drops below $54K, stocks sell-off after new COVID-19 variant emerges

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Cryp­to exchange Derib­it is the absolute leader in the Bit­coin (BTC) options mar­kets, and on Nov. 24, the 25% delta skew indi­ca­tor sig­naled that sen­ti­ment among pro traders was becom­ing “more bear­ish overall.”

Bit­coin price appears to fol­low­ing a descend­ing chan­nel since Nov. 9, so a “bear­ish” sig­nal might be a reflec­tion of the 22% drop since the $69,000 all-time high.

Bitcoin/USD price on Bit­stamp. Source: TradingView

The 25% delta skew com­pares call (buy) and put (sell) options side-by-side. It will turn pos­i­tive when the pro­tec­tive put options pre­mi­um is high­er than sim­i­lar risk call options, thus indi­cat­ing bear­ish sentiment.

The oppo­site holds when mar­ket mak­ers are lean­ing bull­ish, and this caus­es the 25% delta skew indi­ca­tor to enter the neg­a­tive range.

Bit­coin 30-day 25% delta skew. Source: laevitas.ch

Read­ings between neg­a­tive 8% and pos­i­tive 8% are usu­al­ly deemed neu­tral, so Deribit’s analy­sis is cor­rect when it states that a con­sid­er­able shift towards “fear” hap­pened on Nov. 23. How­ev­er, that move­ment eased on Nov. 26 as the indi­ca­tor now stands at 8%, no longer sup­port­ing traders’ bear­ish stance.

What happened in the futures markets?

To con­firm whether this move­ment was spe­cif­ic to that instru­ment, one should also ana­lyze futures markets.

The futures pre­mi­um — also known as the “basis rate” — mea­sures the dif­fer­ence between longer-term futures con­tracts and the cur­rent spot mar­ket lev­els. A 5% to 15% annu­al­ized pre­mi­um is expect­ed in healthy mar­kets, which is a sit­u­a­tion known as contango.

This price gap is caused by sell­ers demand­ing more mon­ey to with­hold set­tle­ment longer, and a red alert emerges when­ev­er this indi­ca­tor fades or turns neg­a­tive, known as “back­war­da­tion.”

Bit­coin 3‑month futures basis rate. Source: laevitas.ch

Unlike the options 25% delta skew, which has shift­ed to “fear,” the futures’ pri­ma­ry risk met­ric was rel­a­tive­ly sta­ble at 11% between Nov. 16 and 25. Despite a minor drop, its cur­rent 9% is neu­tral for futures mar­kets and not even close to a bear­ish tone.

Traders are mostly using call options

One can only make guess­es on why pro traders and mar­ket mak­ers using Bit­coin options mar­kets are over­charg­ing for put (sell) options. Maybe they fear immi­nent risk after a U.S. Sen­ate Com­mit­tee sought infor­ma­tion on the issuance of sta­ble­coins on Nov. 23. 

On that same day, the board of gov­er­nors of the Fed­er­al Reserve Sys­tem announced work on a series of “pol­i­cy sprints” aimed at address­ing reg­u­la­to­ry clar­i­ty in the cryp­to indus­try. The admin­is­tra­tive agen­cies will poten­tial­ly adjust com­pli­ance and enforce­ment stan­dards on exist­ing laws and regulations.

Still, that does not explain why these uncer­tain­ties were not reflect­ed on Bit­coin futures mar­kets. So one must ques­tion whether the 25% skew indi­ca­tor should be dis­re­gard­ed in that case.

Bit­coin Dec. 31 options open inter­est. Source: Coinglass.com

The Dec. 31 Bit­coin options expiry holds 60% of the cur­rent open inter­est, total­ing a $13.4 bil­lion aggre­gate expo­sure. As the above chart shows, there’s vir­tu­al­ly no inter­est on put (sell) options above $60,000.

Con­sid­er­ing call (buy) options are 145% larg­er than the pro­tec­tive puts for Dec. 31, one should not wor­ry too much on how mar­ket mak­ers are pric­ing these instru­ments. Thus, the 25% delta skew shouldn’t hold much impor­tance right now despite Deribit’s bear­ish alert.

The views and opin­ions expressed here are sole­ly those of the author and do not nec­es­sar­i­ly reflect the views of Coin­tele­graph. Every invest­ment and trad­ing move involves risk. You should con­duct your own research when mak­ing a decision.



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