On August 26, the price of Bitcoin (BTC) was pushed up by $750, taking it from $21,120 to $21,870 in only two hours. However, after comments by the chair of the Federal Reserve in the United States, Jerome Powell, in which he reaffirmed the bank’s resolve to manage inflation by tightening the economy, the movement was fully erased. Following Powell’s remarks, the price of Bitcoin fell to a low of $20,244.
Powell made a point of mentioning in his speech at Jackson Hole that the historical evidence strongly recommends against prematurely loosening policy. The U.S. stock market indices reacted unfavorably to these words, with the S&P 500 falling 2.2% within an hour.
The well-known “Bart candle,” which is a reference to the shape of Bart Simpson’s head and a description of the up and down price activity of Bitcoin, appeared on the Bitcoin chart. Aside from these unforeseen indicators of technical analysis, there are additional indicators that point to the general neutral-to-bearish opinion regarding Bitcoin.
Regulators Accelerate The Pace Of Crypto Legislation
The newsflow regarding cryptocurrencies has been unfavorable for some time now, and this is another factor that is weighing on the mindset of investors. The Federal Deposit Insurance Corporation (FDIC) of the United States sent cease and desist letters to five companies, including FTX US, on August 24 for allegedly making misleading promises about deposit insurance connected to cryptocurrencies.
The offices of the cryptocurrency exchange CoinSwitch, which is situated in India, were searched on August 25 by anti-money laundering officials in connection with possible violations of rules governing foreign exchange. CoinSwitch was effectively able to attract capital from investors, including Coinbase Ventures, Andreessen Horowitz, Sequoia, and Tiger Global prior to its launch in India in 2020.
Last but not least, on August 26, the United States Securities and Exchange Commission decided to delay making a decision about a Bitcoin spot exchange-traded fund (ETF) proposed by the global financial company VanEck. Even if the likelihood of acceptance was remote, this strengthened the regulator’s anti-crypto opinion.
Despite the potentially beneficial inflationary environment, which should favor supply-capped assets, cryptocurrency investors are nevertheless facing persistent uncertainty as a result of this situation. For this reason, it is vital to analyze crypto derivatives to determine whether investors have priced in a greater likelihood of a market decline.
Traders Were Neutral To Pessimistic Prior To The Downturn
Because of the significant price gap between them and spot markets, retail traders almost always avoid quarterly futures. However, despite this, they are the favorite instruments of expert traders since they limit the ongoing change of funding rates that frequently takes place within a contract.
In strong markets, the indicator should trade at a premium of 4% to 8% annually to account for associated costs and risks. In contrast, the Bitcoin futures premium has remained below 1.8% over the whole period. The fact that professional traders are averse to adding leveraged long (bull) positions is reflected by this data.
Additionally, one needs to evaluate the Bitcoin options markets in order to eliminate futures-specific externalities. For instance, the 25% delta skew is an indicator that market makers and arbitrage desks are asking excessive prices for upside or downside protection.
In bearish markets, options traders increase the probability of a price decline, causing the skew indicator to soar above 12%. Since August 22, the 30-day delta skew had been fluctuating within close proximity to the neutral-to-bearish threshold, which indicated that options traders were less likely to offer downside protection.
The performance of traditional stock markets may have been a factor in the price drop of Bitcoin that occurred on August 26, as suggested by these two derivatives indicators. However, investors in crypto did not anticipate a rise in value.
Since sentiment has deteriorated since Powell’s statements, there is no opportunity for bullish interpretations of the derivatives data because these data further show that market conditions are deteriorating.
