Traders Opting Cautioned Restraint in the Midst of Falling Bitcoin Prices

The recent 20% drop in Bitcoin’s market valuations over the last 4 days has traders worrying about the cryptocurrency’s ongoing bear phase. Single transactions worth billions of dollars were reported by blockchain explorers. Meanwhile, the fluctuations, though extraordinary, are in line with the global correction of stocks, futures, and other commodities. The futures for natural gas rectified 15.5% within 4 days, while nickel futures reduced 8% yesterday.

Changing Economies: Is a Recession Imminent?

Consistent reports from multiple sources in regards to the poor economy indicate a recession is underway. The Federal Reserve has decided to revert back from its expansive incentives and is currently targeting a US$ 1 trillion reduction of its existing balance sheet. Unit labor expenses across the US rose 11.6%.  Moving on to Europe, Germany has revealed a 4.7% decline in factory orders compared to the previous month.

The Fed rate hike also led to a correction in stock valuations of multiple US companies with a market capitalization exceeding US$ 10 billion. The US stock markets witnessed a notable reduction in the valuation of corporations like Bill.com(30%), Cloudflare(25.4%), Dish Network(25.1%), and Ubiquiti(20.4%).

The current bearish phase through the macroeconomic perspective puts plausible explanations for the correction in Bitcoin and other asset categories. The cautioned approach of regular traders, however, provides additional insight.   

Also Read: The Significance of Inflation and the Subsequent Political Impact on Bitcoin Prices

Stable Bitcoin Futures at 2.5%

The impact of the correction does not reflect on top traders as the futures contracts premium for Bitcoin a.k.a. Basis Rate, has not dipped below the 2% threshold. This indicates that there are no concerns of panic selling at present, though it is true that there is nothing bullish either.  Neutral markets in general feature a basis rate between 5 to 12%. 

Fixed-calendar futures, in general, lack funding rates, unlike perpetual contracts. The valuations differ significantly from conventional spot exchanges. Quarterly futures contracts often trade at annualized premium rates of 5% or even lower, especially when large-scale traders sell and begin the bear phase. 

Also Read: Bitcoin Declared a “Legal Tender” in the Central Republic of Africa

Concerns in the Options Segment

The time-tested 25% delta skew prevalent in options market analysis is showing signs of worry among traders. The current standing is at +14.5% which is a negative indicator, representing worsening fear over the last 4 days. The last time the matrix touched 15% was during January 2022, following a 23.5% drop in 4 same days. 

Unlike usual conventions, a positive indicator occurs in the presence of existing market fear, as “put’’ options for protecting losses in the premium are more than bullish “call” options. Negative skew figures reflect bullish markets, while anything between -8% and +8% is deemed as neutral.

Looking Back at Peak Bullish Crypto Margin Markets

Margin market analysis reflects a recent trend of borrowing additional Bitcoins among traders. The borrowing enables investors to increase returns through trading position leverage. It also allows a person to bet and predict its falling valuation. It is however difficult to match and balance between long and short margin positions. 

The latest reports indicate the lending ratio dipped from 24.5 to 16.8 within this week. This implies despite increased crypto borrowing activities predicting a downhill in valuations, margin traders still hold a positive view, if we go by the lending ratio between USDT and Bitcoins. Figures above 5 indicate a bullish outlook, the recent 24.5 being a 6-month high. 

The Long-Term Picture

The recent slump in Bitcoin’s valuations through support and resistance makes current times a tumultuous time for investment indeed. However, the macroeconomic factors could also result in its bounce-back, with increased investments from the general public. The growing mistrust in government policies and monetary fluctuations is likely to boost investment in a consensus-driven decentralized currency featuring controlled scarcity and transparency to the protection of its values. 

In fact, a section of market analysts is optimistic, placing their hopes on Bitcoin not only regaining its lost valuation but also soaring off to newer highs. If we look back at history, Bitcoin has bounced back from lows and scaled newer highs. Also, the beginning of the Fed’s 2015 interest hike fortified BTC valuations, gradually reaching to a high in 2017 December. 

Wrapping Up

Research metrics in the derivatives segment indicate Bitcoin’s 20% price correction is a result of the deterioration of macroeconomic indicators similar to other risk assets. Things are not grim in all aspects- panic selling or short-term leverage bets through margin trading or futures stay well below alarming levels.