Key derivative indicators show that professional traders remain steadily bullish, even as the price of Bitcoin continues to reject the USD 19,800.
Most investors who follow Bitcoin closely will have heard recently about the growing impact that the Bitcoin futures and options markets (BTC) have on the price of cryptography. The same can be said about the price swings caused by settlements on the OKEx and Huobi exchanges.
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With the derivatives markets now playing a bigger role in Bitcoin price fluctuations, there’s a growing need to analyze some of the key metrics that professional traders use to measure market activity.
While analyzing activity in the futures and options markets can be very complicated, the average retail trader can benefit from knowing how to correctly interpret the futures premium, the funding rate, the delta slope of the options and the sell/buy ratio.
The futures premium measures how expensive longer-term futures contracts are relative to the current spot price in traditional markets. It can be seen as a relative reflection of investor optimism, and fixed date futures tend to trade at a slight premium to regular spot exchanges.
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Two-month futures should be traded at a premium of 0.8% to 2.3% in healthy markets, and any figure above this range denotes extreme optimism. Meanwhile, the lack of a futures premium points to bearish sentiment.
Premium on BTC 2-month futures contracts
Last week was a roller coaster and the indicator reached 2% on November 24th, while the price of Bitcoin peaked at USD 19,434.
Although the premium currently stands at 1.1%, what is more significant is that although the price suffered a drop of 14%, the indicator remained above 0.8%. Generally, investors see this level as bullish, and today we can see that the price of Bitcoin secured a new high above USD 19,900.
Perpetual Futures Funding Rate
Perpetual contracts, also known as reverse swaps, have a built-in commission that is usually charged every eight hours. The financing rates ensure that there are no exchange rate risk imbalances. Although the open interest of buyers and sellers is equal at all times, the leverage can vary.
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When the (long) buyers are the most demanding in terms of leverage, the financing rate becomes positive. Therefore, those buyers will be the ones paying the commissions. This situation is especially true in periods of bullish runs, when there is normally more demand for long.
Sustainable rates above 2% per week translate into extreme optimism. This level is acceptable during market rallies, but becomes problematic if the BTC price moves sideways or if there is a downward trend.
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In situations like these, the high leverage of buyers presents the potential for cascading liquidations during sudden price drops.
BTC Perpetual Futures Financing Rates
Note how, despite the recent upward run, the weekly financing rate has managed to stay below 2%. These data indicate that although traders are optimistic, buyers did not abuse the leverage. Similarly, during the price drop of USD 1,400 on November 26, the indicator maintained a healthy neutral level.