Bitcoin traders experienced more downward pressure following a 5.5% decrease in BTC value on March 7. Possible future interest rate hikes by the U.S. Federal Reserve and regulatory pressure in the crypto industry are some of the factors driving this movement.
The financial market is displaying signs of stress as the inverted bond curve has achieved its highest level since the 1980s. Longer-term bond yields have been static at 4%, while two-year treasury notes were trading above 5% yield in March.
Since July, longer-term treasury yields have been unable to keep up with the increasing two-year benchmark, resulting in the inverted curve distortion that typically happens before an economic downturn. According to Bloomberg, the indicator reached a full percentage point on March 7, the highest level since 1981, when Fed Chair Paul Volcker encountered double-digit inflation.
This week, BlackRock, the world’s largest asset manager, raised its outlook for U.S. federal funds to 6%. Rick Rieder, chief investment officer of global fixed income at BlackRock, believes the Fed will keep interest rates high for an extended time in order to slow the economy and get inflation to around 2%.
Fear of crypto regulation intensifies
According to a Wall Street Journal article, the Biden administration is looking to implement the wash sale rule to crypto, which would eliminate a strategy where a trader sells and then immediately purchases digital assets for tax purposes.
In addition, the Public Company Accounting Oversight Board, an organization working with the U.S. Securities and Exchange Commission to monitor public company audits, recently published a warning to investors about proof-of-reserves reports.
The agency said that “Investors should note that PoR engagements are not audits and, consequently, the related reports do not give any meaningful assurance.”
Let’s look at derivatives metrics to better understand how professional traders are situated in the current market conditions.
Bitcoin margin markets have gone back to normal
Margin markets can give insight into how professional traders are acting since they allow investors to borrow cryptocurrency to leverage their positions.
For example, one can increase their exposure by borrowing stablecoins and buying Bitcoin. Borrowers of Bitcoin, on the other hand, can only take short bets against the cryptocurrency.
The chart above shows that OKX traders’ margin lending ratio dropped dramatically on March 9, shifting away from a situation that previously favored leverage long positions. Given the general bullishness of crypto traders, the current margin lending ratio at 16 is relatively neutral.
On the other hand, a margin lending ratio above 40 is very rare, although it had been the norm since Feb. 22. It is partially pushed by a high borrowing cost for stablecoins of 25% per year. Following the recent anomaly, the margin market has reverted to a neutral-to-bullish state.
Options traders are pricing in a low risk of extreme price corrections
Traders should also evaluate options markets to understand whether the recent correction has caused investors to become more risk-averse. The 25% delta skew is a telling sign whenever arbitrage desks and market makers overcharge for upside or downside protection.
The indicator compares similar call (buy) and put (sell) options and will turn positive when fear is prevalent because the premium for protective put options is higher than the premium for risk call options.
In short, if traders anticipate a Bitcoin price drop, the skew metric will rise above 10% and generalized excitement has a negative 10% skew.
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Despite the fact that Bitcoin failed to break the $25,000 resistance on Feb. 21 and then experienced a 14% correction in 16 days, the 25% delta skew remained in the neutral zone for the past month. The present positive 3% skew indicates a balanced demand for bullish and bearish option instruments.
Derivatives data reveals that professional traders are not willing to go bearish, as shown by options traders’ neutral risk assessment. Additionally, the margin lending ratio illustrates that the market is improving as some demand for bearish bets has materialized, but the structure remains neutral-to-bullish.
Given the huge downward price pressure from a macroeconomic standpoint, as well as the continued regulatory pressure in the U.S., bulls should probably be content that Bitcoin derivatives have stayed steady.
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This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
