Is Excessive Bullish Optimism Behind Bitcoin’s Fall Below $60K? – News Couple
CRYPTO NEWS

Is Excessive Bullish Optimism Behind Bitcoin’s Fall Below $60K?


Bitcoin (BTC) has a long history of forming local tops when events that the market anticipates occur. The recent launch of the Bitcoin Exchange Traded Fund (ETF) on October 19 was no different and led to a monthly rise of 53% to an all-time high of $67,000.

Now that the price has briefly fallen below $60K, investors are trying to understand whether a 10% retracement is a healthy short-term profit-taking or the end of an uptrend. To determine this, traders need to analyze BTC’s past price activity to assess potential similarities.

Bitcoin price in US dollars. Source: TradingView

The chart above depicts the day of a major New York Times ad announcing that “Bitcoin is getting a cautious nod from China’s central bank” in November 2013. At the time, Yi Gang, deputy governor of the People’s Bank of China, said people could freely participate in the bitcoin market. He even mentioned a personal view that suggested a constructive long-term view of the digital currency.

It is also worth noting that this positive media coverage on state-run Chinese TV was broadcast on October 28, showing the world’s first Bitcoin ATM in Vancouver.

Bearish events can also be expected

Bearish examples can also be found throughout the 12-year Bitcoin price action. For example, China’s April 2014 ban was a 5-month low.

Bitcoin price in US dollars. Source: TradingView

On April 10, 2014, Huobi and BTC Trade, the two largest exchanges in China, said that their trading accounts with some local banks would be closed within one week. Once again, the rumor has been circulating since March 2014, fueled by a note on Chinese news outlet Caixin.

Recent events included the launch of the CBOE Bitcoin futures contract on December 19, 2017, which preceded the infamous all-time high of $20,000 by a day. Another event that marked the local peak was the Coinbase IPO on the Nasdaq when the bitcoin price reached $64,900. Both events are indicated on the following chart:

Bitcoin price on Coinbase in US dollars. Source: TradingView

Note how all of the above events were pretty much predictable, even though some didn’t have an exact announcement date. For example, the initial trading session for the Bitcoin futures-based index ETF on October 19 was preceded by the statement on August 3 by Gary Gensler, head of the SEC, that the regulator would be open to accepting the implementation of a BTC ETF using CME derivatives instruments.

Investors have probably already put themselves ahead of the launch of the ProShares Bitcoin Strategy ETF and a look at the BTC derivatives markets can provide more information on this.

Futures premium was not ‘overrated’

The futures premium, also known as the underlying price, measures the price gap between futures prices and the regular spot market. Quarterly futures contracts are the preferred instruments of whale and arbitrage desks. Although it may seem complicated to retail traders due to the settlement history and price difference from the spot markets, the most important advantage for them is the lack of a volatile funding rate.

Some analysts have pointed to the “return of contango” after the price of pes reached 17%, a 5-month high.

Normally, futures markets of any type (Soybean, S&P 500, WTIl) will trade at a slightly higher price versus the regular spot market. This mainly happens because the investor needs to wait until the contract expires to collect their payments, so there is an opportunity cost involved, and this causes the premium.

The annual premium on Bitcoin futures for 3 months. Source: laevitas.ch

Suppose one is doing arbitrage trades, with the aim of maximizing the funds held in US dollars. This trader can buy a stablecoin and get an annual return of 12% using Decentralized Finance (DeFi) or central crypto lending services. The 12% premium in the Bitcoin futures market should be considered a “neutral” price for the market maker.

Excluding a short-lived 20% peak on Oct. 21, the core rate has remained below 17% after a 50% rise in the month to date. For comparison, on the eve of the launch of Coinbase shares, the premium for futures contracts rose to 49%. Therefore, those who call the current scenario somewhat over-optimistic are mistaken.

Liquidation risks were not ‘imminent’

When buyers are overconfident and accept a large premium for leverage using futures contracts, a 10%-15% drop in price can lead to back-to-back liquidations. However, just having an annual premium of 40% or higher does not necessarily translate into imminent crash risk because buyers can add margin to keep their positions open.

As the major derivatives gauge shows, the 10% drop from an all-time high of $67,000 on October 20 was not enough to cause any sign of concern from professional traders as the underlying rate settled at a healthy 12%.

The opinions and opinions expressed here are solely those of author and do not necessarily reflect the opinions of Cointelegraph. Every investment and trading movement involves risks. You should do your research when making a decision.