Bitcoin had been underperforming against most altcoins ov the past two months, but that trend reversed when its 20% rally pushed its market capitalization to break the $1 trillion mark on Oct. 6. That shifted investors’ attention back to the leading cryptocurrency, and altcoins are currently in the red for the day.
The current positive momentum could be dangerous if Bitcoin (BTC) traders become overconfident and abuse leverage to open long positions. To avoid this, traders need to carefully analyze derivatives markets to exclude this risk.
Notice above how the altcoin market capitalization increased by 5.8%, while Bitcoin posted a 20.8% gain in the same period. Sure enough, there were some outliers such as Shiba Inu (SHIB), which rose by 200%, Fantom (FTM), which rallied 60%, and Klaytn (KLAY), which gained 36%. However, the aggregate market capitalization from altcoins did not accompany Bitcoin’s performance.
Some well-known personalities have spoken up, such as billionaire Wall Street investor Bill Miller, who recently expressed his optimism for Bitcoin while raising concerns regarding most altcoin projects. Miller explicitly mentioned the “big banks” getting involved and referred to “huge amounts” of venture capital money flowing into Bitcoin.
The recent Bitcoin frenzy seems driven by the macroeconomic scenario. The United States increased its debt limit by $480 billion to pay off its obligations until early December. The inflationary pressure brought by unending stimulus packages and meager interest rates has been fueling the long rally in commodities.
For example, oil reached its highest level in seven years and wheat futures recently hit a record high not seen since February 2013. Even the S&P Case-Shiller home price index has presented an annualized 23.3% gain.
To understand if Bitcoin traders got overly excited, traders should analyze Bitcoin’s derivatives indicators like the futures markets premium and options skew.
The futures premium shows traders are slightly bullish
The basis rate measures the difference between longer-term futures contracts and the current spot market levels. This indicator is also frequently referred to as the futures premium.
A 5% to 15% annualized premium is expected in healthy markets, which is a situation known as “contango.” This price difference is caused by sellers demanding more money to withhold settlement longer.
The recent 20% Bitcoin price rally caused the indicator to reach the upper limit of this neutral zone, meaning investors are bullish but not yet overconfident. Whenever buyers demand excessive leverage, the basis rate can easily surpass 25%, as seen in mid-May.
To exclude externalities specific to the futures instrument, one should also analyze options markets.
Bitcoin options signal “neutral” sentiment
The 25% delta skew compares similar call (buy) and put (sell) options. This metric will turn positive whenever “fear” is prevalent because traders expect potential downside.
The opposite holds when option traders are bullish, causing the 25% delta skew indicator to shift to the negative area. Readings between -8% and +8% are usually deemed neutral.
The above chart shows that there hasn’t been a single instance of options traders becoming overconfident in the past six months, which would signal “greed” because the 25% delta skew dropped below -8%. Meanwhile, the indicator has ranged near 0 for the past week, showing balanced risks between the bears and bulls.
Those findings necessarily show a lack of confidence from buyers, but it is quite the opposite. Had Bitcoin bulls already been overly confident at $57,000, there would be little room for additional leverage, increasing the risk of a cascading liquidation if a momentary price correction occurred.
Bulls are modestly confident, and even a 20% price correction is unlikely to change the situation because the futures market’s basis rate shows a reasonable premium after the recent rally.
