All the bark and a bit of bite. China's Bitcoin ban puts traders in 'fear zone'

China bans Bitcoin ( BTC ), again. No, we are not time traveling. On September 24, the People’s Bank of China (PBoC) released a new ser...


China bans Bitcoin (BTC), again.

No, we are not time traveling. On September 24, the People’s Bank of China (PBoC) released a new series of measures promote inter-ministerial coordination to combat cryptographic activity. The measures were aimed at “cutting off payment channels, disposing of relevant websites and mobile applications in accordance with the law”.

Most investors may have missed the 3 billion BTC and $ 1.5 billion ether (ETH) the monthly options expiration which took place less than an hour before the news of the crypto ban was released. According to “Molly,” a former contributor to Bitcoin Magazine, China’s remarks were originally posted September 3.

However, if an entity were aiming to profit from the negative price movement, releasing the news ahead of the expiration at 8:00 UTC on Friday would have made more sense. For example, the $ 42,000 protection put option became worthless because Deribit’s expiration price was $ 44,873. This option holder had the right to sell Bitcoin at $ 42,000, but it has no value if the BTC expiration occurs above that level.

For conspiracy theorists, the Chicago Mercantile Exchange (CME) Bitcoin futures contract expiration is the average price between 2:00 p.m. and 3:00 p.m. UTC. As a result, potential open interest of $ 340 million settled near the $ 42,150 level. In futures markets, buyers (long) and sellers (shorts) are matched at all times, making it virtually impossible to guess which side has the most firepower.

Bitcoin price on Bitstamp in USD. Source: TradingView

Despite the negative price change of $ 4,000, overall closeouts on leveraged long futures were less than $ 120 million. This data should be of great concern to bears as it indicates that bulls are not overconfident and do not use extreme leverage.

Professional traders showed some doubt but remained neutral

To analyze how bullish or bearish professional traders are, it is worth watching the term premium, also known as the “base rate”.

The indicator measures the difference between long-term futures contracts and current spot market levels. An annualized premium of 5-15% is expected in healthy markets, which is a situation known as contango.

This price differential is due to sellers asking for more money to suspend settlement for longer, and a red alert appears whenever this indicator fades or turns negative, known as “backlash.” “

3-month Bitcoin futures base rate. Source: Laevitas.ch

Notice how the sharp drop caused by the negative 9% move on September 24th caused the annualized term premium to hit its lowest level in two months. The current 6% indicator sits at the bottom of the “neutral” range, ending a moderate bullish period that lasted until September 19th.

To confirm whether this movement was specific to this instrument, it is also necessary to analyze the options markets.

Options Markets Confirm Traders Enter ‘Fear’ Zone

The 25% delta asymmetry compares similar call (buy) and sell (put) options. The metric will turn positive when “fear” prevails, as the premium of protective puts is higher than similar risky calls.

The reverse is true when market makers are bullish, causing the 25% delta asymmetry indicator to go into the negative zone. Readings between minus 8% and plus 8% are generally considered neutral.

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

The 25% delta skew has been in the neutral zone since July 24, but reached 10% on September 22, signaling the “fear” of options traders. After a brief retest of the 8% neutral level, today’s Bitcoin price action took the indicator above 11%. Again, a level last seen two months ago, and very similar to the BTC futures markets.

While no bearish signs have emerged in the Bitcoin derivatives market, today’s fall below $ 41,000 has marked professional traders into ‘fear’ mode. As a result, futures traders are reluctant to open leveraged long positions, while options markets show a premium for protective puts.

Unless Bitcoin shows strength over the weekend, bears could take advantage of the current investor panic.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trade move involves risk. You should do your own research before making a decision.