All bark and some bites.China’s Bitcoin ban puts traders in a “fear” zone


China bans Bitcoin (Bitcoin), again.

No, we will not go back in time. On September 24, the People’s Bank of China (PBoC) released New measures Promote inter-departmental coordination to combat cryptocurrency activities. The measure is aimed at “cutting off payment channels and disposing of relevant websites and mobile applications in accordance with the law.”

Most investors may have missed 3 billion U.S. dollars in Bitcoin with 1.5 billion U.S. dollars in ether (Ethereum) Monthly option expiration that occurred less than an hour before the announcement of the cryptocurrency ban.According to the former Bitcoin Magazine contributor “Molly”, the comments from China are Initially released September 3.

However, if an entity’s goal is to profit from negative price volatility, it makes more sense to publish a message before the expiration of 8:00 AM UTC on Friday. For example, a $42,000 protective put option becomes worthless because Deribit’s expiration price is $44,873. The option holder has the right to sell Bitcoin at a price of $42,000, but if the BTC expires above that level, there is no value.

For conspiracy theorists, the expiry date of the Chicago Mercantile Exchange (CME) Bitcoin futures is the average price between 2:00 pm and 3:00 pm UTC. Therefore, the potential open interest of US$340 million is settled near US$42,150. In the futures market, the buyer (long) and the seller (short) are always in a match state, so it is almost impossible to guess which side has more firepower.

Bitstamp’s Bitcoin price (in U.S. dollars). Source: TradingView

Despite the negative price fluctuation of US$4,000, the total liquidation volume of leveraged long futures contracts was less than US$120 million. This data should worry the bears very much, because it shows that the bulls are not overconfident, nor are they using extreme leverage.

Professional traders show some skepticism but remain neutral

To analyze how bullish or bearish professional traders are, one should monitor the futures premium-also known as the “basis”.

This indicator measures the difference between long-term futures contracts and the current level of the spot market. In a healthy market, the annualized premium is expected to be 5% to 15%. This situation is called a futures premium.

This price gap is caused by sellers asking for more money to suspend settlement for a longer period of time. Whenever the indicator disappears or becomes negative, a red alert will appear, which is called a “rollback”.

Bitcoin 3-month futures contract benchmark interest rate. Source: Laevitas.ch

Note how the sharp drop caused by the negative 9% movement on September 24 caused the annualized futures premium to reach its lowest level in two months. The current 6% indicator is at the bottom of the “neutral” range, ending the mild bullish period that lasted until September 19.

To confirm whether this change is specific to the instrument, the option market should also be analyzed.

The options market confirms that traders are entering the “fear” zone

The 25% delta skew compares similar call (buy) and put (sell) options. When “fear” prevails, this indicator will become positive because the premium of protective put options is higher than that of call options with similar risks.

When the market maker is bullish, the opposite is true, causing the 25% delta skew indicator to shift to the negative zone. Readings between minus 8% and plus 8% are generally considered neutral.

Deribit Bitcoin options 25% delta skew. Source: laevitas.ch

Since July 24, the 25% delta skew has been hovering in the neutral zone, but it soared to 10% on September 22, indicating that option traders are “feared”. After a brief retest of the neutral 8% level, today’s Bitcoin price movement caused the indicator to rise above 11%. It reappeared at the level two months ago, very similar to the BTC futures market.

Although there are no bearish signs in the Bitcoin derivatives market, today’s drop below $41,000 marks the transition of professional traders to a “fear” mode. The result is that futures contract traders are reluctant to open leveraged long positions, and the options market shows a premium for protective put options.

Unless Bitcoin shows strength over the weekend, the bears may profit from investors’ current panic.

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