Professional Bitcoin traders were unaffected by the recent 9.6% price correction and derivatives data reflect a healthy market.
The 9.6% intraday Bitcoin (BTC) price correction on Jan. 3 dropped the price to $40,940 and created turmoil and substantial losses for derivative traders. This is evident from the $137 million in leverage long futures liquidations, marking the highest in over four months.
Fortunately, for bulls, Bitcoin price rebounded somewhat quickly and currently trades above $44,000. This has raised the question of whether BTC price can reach $46,000 before the upcoming SEC decision on the spot Bitcoin exchange-traded fund (ETF) applications.
U.S government debt trend favors risk-on assets, including Bitcoin
The surging U.S. government debt and expectations of interest rate cuts by the U.S. Federal Reserve (FED) provide a constructive scenario for risk-on markets, including cryptocurrencies. Minutes from the recent Federal Open Market Committee meeting, released on Jan. 4, strengthened expectations of 6 quarter-point cuts this year. Notably, U.S. government debt interest has exceeded $1 trillion per year, as reported by Bloomberg.
Mounting debt and political discord in the U.S. have led to credit rating downgrades. Fitch downgraded the sovereign debt rating from AAA to AA+ in August 2023, and Moody’s warned of a potential downgrade from the remaining AAA rating. Lower House Republicans aim to cut spending below the levels agreed upon in the June debt ceiling deal, while Senate Democrats oppose such cuts, leaving the threat of a government shutdown looming.
Investors are pricing in further U.S. government debt issuance and the subsequent loss of the dollar’s purchasing power. This trend tends to affect other fiat currencies as central banks follow the Fed’s lead, keeping high-interest rates to restrain economic growth. However, the U.S. deficit could become unsustainable if the monetary authority insists on achieving the 2% inflation target before lowering interest rates.
Bitcoin futures display resilience after the Jan. 3 price crash
To determine whether Bitcoin’s price gains after the Jan. 3 crash can continue and potentially break above the $46,000 resistance, one must analyze BTC derivatives markets.
It’s important to note that the $137 million liquidation on Jan. 3 did not decimate the bulls. For starters, BTC futures open interest remains at $18.5 billion, meaning less than 1% of contracts were affected by the recent price crash. Additionally, data remains consistent with the previous month, downplaying the significance of recent price swings.
To understand professional traders’ positions after the surprise rally, one should analyze BTC derivatives metrics. Bitcoin monthly futures typically trade at a 5%-10% annualized premium compared to spot markets, indicating that sellers demand additional money to postpone settlement.
Bitcoin 1-month futures premium at Deribit. Source: Laevitas
The current Bitcoin futures premium stands at 18%, remaining unchanged from the previous week. The unusual aspect was the exaggerated 31% peak on Jan. 2. Traders displayed excessive confidence in ETF approval odds before Jan. 10, relying on excessive leverage, which ultimately exposed them to liquidations during price volatility.
Bitcoin options leave room for upside surprise in the case of a spot ETF approval
To assess whether the dip below $41,000 dashed bullish hopes, one should examine the Bitcoin options markets. During anticipation of a Bitcoin price drop, the delta 25% skew tends to rise above 7%. In contrast, periods of excitement typically see a delta skew below negative 7%.
Bitcoin 30-day options 25% delta skew. Source: Laevitas
Notice how the Bitcoin options skew barely changed during the recent price drop on Jan. 3, indicating that pro traders were not affected and did not rush for protective put options. If these traders had feared a negative or postponed ETF decision, the 25% skew indicator would have shifted accordingly.
Experienced traders appear unaffected by the price swing and are accustomed to the FOMO and FUD that surround significant events like a potential ETF approval. Nevertheless, this does not guarantee a bull run above $46,000 ahead of the SEC decision, especially given that investors had ample time to accumulate and strategize due to the regulator’s publicized deadlines.
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.