In a recent post on the forum of FX Empire, a user stated that because of the backwardation in Bitcoin futures prices, it was likely that Bitcoin shorts were about to take a significant hit. The post was making the rounds on social media sites like Twitter and Reddit.
In this article I will explain why backwardation is present on some bitcoin futures contracts, and why it is a good sign for the markets.
On November 2nd 2017, the Chicago Board Options Exchange (CBOE) launched bitcoin futures trading, marking the first true institutional investors to get involved in Bitcoin. Bitcoin futures trading has led to a surge of new investors, and is expected to help drive the price of Bitcoin to new highs. However, the fact that Bitcoin is trading at a $2,000 premium to the underlying spot price of Bitcoin, suggests that more and more people still do not believe the price of Bitcoin will continue to rise.. Read more about bitcoin futures curve and let us know what you think.Bitcoin (BTC) may have tested the $40,000 support level in mid-July, but according to several derivative metrics, investor optimism has not changed significantly.
This either means that price is not what they are looking for to mark the end of the current bear market or that most traders are still below $40,000.
One of the best indicators of optimism is the futures premium, which measures the spread between long-term contracts and the current level of the spot market. In healthy markets, an annual premium of 5 to 15% is expected. However, during falling markets this indicator fades or turns negative, a situation known as backwardation, which is an alarming red flag.
deribit options bitcoin 25% delta skew. Source : laevitas.ch
A delta of 25% between 10% negative and 10% positive is generally considered neutral. However, since September 30, the indicator has been falling. June is above this range, reflecting the concerns of arbitrage managers and the markets.
The last time this indicator showed bullish sentiment was on the 14th. April, the day it hit a record high of $64,900.
Since none of the derivative indicators showed signs of rising, even when bitcoin rose on the 15th. June has remained above $40,000, there is reason to believe that investors are not comfortable opening long positions at this time. It remains to be seen what a turnaround in sentiment will bring, but it will certainly take more than a single 10% rally.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Cointelegraph. Every investment and every stage of trading involves risk. You should do your own research before making a decision.The Bitcoin market is a chaotic place, and it doesn’t show signs of improvement. The price of Bitcoin, which has been falling for most of the year, has plummeted in December, with nearly $2 billion in value wiped off the market. Investors have been quick to blame the problem on short-squeeze trading, which they say is driving prices down, but few have touched upon a more likely explanation: weak demand for Bitcoin futures contracts.. Read more about stock.market futures and let us know what you think.
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