Is a retail frenzy causing the Bitcoin futures’ markets excessive leverage?


Bitcoin (BTC) broke the $ 50,000 level on February 16th. But while it clearly fails to break the psychological barrier, it has undoubtedly demonstrated the potential for higher ratings.

Meanwhile, futures and options indices are inconsistent, indicating increased influence of buyers, while options markets remain calm. After analyzing both markets, one can theorize what caused this apparent paradox.

The options deviation remained neutral to positive

When analyzing options, the delta 25% slope is the single most relevant metric. This indicator compares buy (buy) and sell (sell) options side by side.

It will turn negative when the premium for put options is higher than the equivalent risk call options. Negative skew translates into higher downside protection cost, indicating an upside.

The opposite holds when market makers are bearish, causing the 25% Delta Deviation Index to take a positive floor.

Deribit 30-day BTC options 25% delta deflection. Source: laevitas.ch

Divergence indicator between minus 10% (slightly bullish) and positive 10% (somewhat bearish) is considered normal. Over the past 3 months, there has not been a single event of deviation of 10% or higher for 30 days, which is usually considered a bearish event.

This data is very encouraging, considering Bitcoin saw a 24% correction on January 11, plus a selloff of 19% ten days later. However, there is no evidence that options traders requested more significant bonuses to guard against the downside.

Futures premium maintained overly optimistic levels

By measuring the expense gap between the futures contract and the regular spot market, a trader can gauge the level of an uptrend in the market.

Typically 3-month futures contracts should be traded at an annual premium of 6% to 20% (basis) versus normal spot exchanges. When this indicator fades or turns negative, this is an alarming red flag. This situation is known as a pullback and indicates that the market is trending down.

On the other hand, a sustainable basis above 20% indicates excessive influence from buyers, which creates the potential for a massive liquidation and eventual market crash.

2021 BTC Futures Premium. Source: NYDIG Digital Asset Data

The chart above shows that the index fell at 1.5% on January 27 but later returned to 4.5% and higher as Bitcoin rebounded above $ 35,000. Even during its darkest period, the futures premium remained above the 10% annual rate, indicating the optimism of professional traders.

Meanwhile, the current level of 5.5%, equivalent to a 50% annual rate, indicates excessive buyer’s influence. Permanent futures contracts (inverse swaps) can be the root of this problem, and retailers use these contracts widely.

Funding Weekly Bitcoin Futures Rate. Source: NYDIG Digital Asset Data

Be aware that the funding rate has exceeded 2.5% per week, and thus more than the annual premium compensation of 50% for the March contracts.

Therefore, it is possible that arbitrage bureaus and market makers will be happy to pay such a hefty premium on fixed month contracts while at the same time cutting prices short in the permanent future and profit from the spread.

In conclusion, this move fully explains why the options markets are relatively neutral while the futures markets show increased influence of buyers. While institutional clients and whales dominate option sizes, retailers appear to be the main culprit for this mismatch.

The opinions and opinions expressed herein are solely of those of The authors They do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risks. You must do your own research when making the decision.