Bitcoin (Bitcoin) There is a long history of forming a partial top when an event anticipated by the market occurs. The Bitcoin Exchange Traded Fund (ETF), which was recently launched on October 19, was no exception, causing a monthly increase of 53% to a record high of $67,000.
Now that the price has briefly fallen below $60,000, investors are trying to understand whether the 10% correction is the end of a healthy short-term profit or the end of the bull market. To determine this, traders need to analyze the previous price activity of BTC to assess possible similarities.
The picture above depicts the New York Times headline announcing “Bitcoin gets a cautious nod from China’s central bank“In November 2013. At that time, the Deputy Governor of the People’s Bank of China (POBC) Yi Gang stated that people can freely participate in the Bitcoin market. He even mentioned a personal point of view and put forward a constructive long-term view of digital currency.
It is also worth mentioning that this favorable media report, which was broadcast on China’s official television station on October 28, showed the world’s first Bitcoin ATM in Vancouver.
Bearish events can also be expected
A bearish example can also be found in Bitcoin’s 12-year price trend. For example, the April 2014 China ban marked a five-month price bottom.
April 10, 2014, Huobi and BTC tradingThe two largest exchanges in China stated that their trading accounts in certain domestic banks will be closed within a week. Again, Rumors have been circulating Since March 2014, this has been driven by a report by the Chinese news media Caixin.
Include more recent events Chicago Board Options Exchange Bitcoin Futures Launched on December 19, 2017, a day earlier than the notorious all-time high of $20,000.Another event that marks the top local level is Coinbase IPO On Nasdaq, the price of Bitcoin reached $64,900. Both of these events are signaled in the following table:
Please note how all the above events are expected to a large extent, even if there are no exact announcement dates for some events.For example, before the initial trading session on October 19 for Bitcoin futures-based ETFs, SEC Chairman Gary Gensler issued a statement on August 3 stating that the regulator will Open to accepting BTC ETF Applications that use CME derivatives.
Investors may have positioned themselves before the launch of the ProShares Bitcoin Strategy ETF, and looking at the BTC derivatives market may provide more insights.
Futures premiums are not “exaggerated”
The futures premium, also known as the basis, measures the price gap between the futures contract price and the regular spot market. Quarterly futures are the tool of choice for whales and arbitrage platforms. Although retail traders may seem complicated due to settlement dates and price differences with the spot market, their most significant advantage is the absence of fluctuating financing rates.
Some analysts pointed out that after the bais rate reached 17%, the “positive spread return” was the highest level in 5 months.
— Dylan LeClair (@DylanLeClair_) October 20, 2021
Under normal circumstances, the trading price of any kind of futures market (soybeans, S&P 500, WTIl) will be slightly higher than the regular spot market. This happens mainly because the investor needs to wait until the contract expires to recover his expenses, so there is an opportunity cost, which will lead to a premium.
Let us suppose that someone conducts an arbitrage transaction with the aim of maximizing the amount of funds held in US dollars. The trader can use Decentralized Finance (DeFi) or centralized encrypted lending services to purchase stablecoins and obtain an annualized rate of return of 12%. The 12% premium in the Bitcoin futures market should be considered a “neutral” interest rate for market makers.
Excluding the short 20% high on October 21, the basis is still below 17% after rising 50% so far this month. In contrast, on the eve of the Coinbase stock issuance, the futures premium soared to 49%. Therefore, those who call the current situation too optimistic are wrong.
Liquidation risk is not “imminent”
Whenever buyers are overconfident and accept the high leverage premium of using futures contracts, a 10% to 15% price drop may trigger a cascading liquidation. However, the mere existence of an annualized premium of 40% or higher does not necessarily translate into an imminent risk of a crash, because buyers can increase their margin to maintain their positions.
As the major derivatives indicators show, a 10% drop from the historical high of $67,000 on October 20 is not enough to cause any concern for professional traders, as the basis remains at a healthy 12%.
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