Is excessive bullish optimism behind Bitcoin's fall below $ 60,000?

Bitcoin ( BTC ) has a long history of forming local highs when events anticipated by the market occur. The recent launch of the Bitcoin ...


Bitcoin (BTC) has a long history of forming local highs when events anticipated by the market occur. The recent launch of the Bitcoin exchange-traded fund (ETF) on October 19 was no different and led to a monthly rally of 53% to an all-time high of $ 67,000.

Now that the price has briefly fallen below $ 60,000, investors are trying to figure out whether the 10% correction was healthy short-term profit taking or the end of the bull run. To determine this, traders should analyze BTC’s previous price activity to assess possible similarities.

Bitcoin price in USD. Source: TradingView

The graphic above represents the day of a New York Times headline announcing that “Bitcoin gets cautious nod from China’s central bank“in November 2013. At the time, Yi Gang, the vice-governor of the People’s Bank of China (POBC), said that people could freely participate in the Bitcoin market. He even brought up a personal point of view that suggested a constructive long-term perspective on digital currency.

It’s also worth mentioning that this favorable media coverage on Chinese public television aired on October 28 and showed the world’s first Bitcoin ATM in Vancouver.

Bearish events can also be anticipated

Bearish examples can also be found throughout Bitcoin’s 12-year price action. For example, the Chinese ban of April 2014 marked a 5-month low in prices.

Bitcoin price in USD. Source: TradingView

April 10, 2014 Huobi and BTC trading, China’s two largest stock exchanges, said their trading accounts at some national banks would be closed within a week. Once again, rumors were circulating since March 2014, and this was fueled by a note on Chinese media Caixin.

More recent events included Bitcoin CBOE futures launched on December 19, 2017, which preceded the infamous $ 20,000 record by one day. Another event that marked a local high was the Coinbase IPO on the Nasdaq when the price of Bitcoin hit $ 64,900. Both events are shown in the following graph:

Bitcoin price on Coinbase in USD. Source: TradingView

Notice how all of the above events were widely anticipated, although some did not have a specific announcement date. For example, the initial trading session of the Bitcoin Futures ETF on October 19 was preceded by the statement by SEC Chairman Gary Gensler on August 3 that the regulator would be open for acceptance of a BTC ETF application using CME derivative instruments.

It is possible that investors have already positioned themselves before the launch of the ProShares Bitcoin Strategy ETF and a review of the BTC derivatives markets could possibly provide more information on this.

The term premium was not “exaggerated”

The forward premium, also known as the base rate, measures the price differential between the prices of futures contracts and the regular spot market. Quarterly futures are the preferred instruments of whales and arbitrage bureaus. While this may seem complicated to retail traders due to their settlement date and price difference compared to spot markets, their most important advantage is the absence of fluctuating funding rates.

Some analysts have pointed to the “return of contango” after the kiss rate reached 17%, the highest level in 5 months.

In a normal situation, futures markets of any kind (soybeans, S&P 500, WTIl) will trade at a price slightly higher than the regular spot market. This mainly happens because the investor has to wait until the contract expires to collect their payment, so there is an opportunity cost built in, resulting in the premium.

Annualized premium for 3-month Bitcoin futures contracts. Source: laevitas.ch

Suppose that one carries out arbitrage transactions, aiming to maximize the funds held in USD. This trader could buy a stablecoin and earn a 12% annualized return using Decentralized Finance (DeFi) or centralized crypto lending services. A 12% premium on the Bitcoin futures market should be considered a “neutral” rate for a market maker.

Excluding the ephemeral peak of 20% on October 21, the base rate remained below 17% after rising 50% since the start of the month. For comparison, on the eve of Coinbase’s stock launch, the term premium skyrocketed to 49%. Therefore, those who characterize the current scenario as overly optimistic are simply wrong.

Liquidation risks were not “imminent” either.

Anytime buyers are overconfident and accept a high premium for leverage using futures, a 10-15% drop in prices could trigger cascading sell-offs. However, the mere presence of an annualized premium of 40% or more does not necessarily translate into imminent crash risk as buyers can add margin to keep their positions open.

As the leading derivative measure shows, a 10% drop from the all-time high of $ 67,000 on October 20 was not enough to worry professional traders as the base rate was at a healthy level of 12. %.

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.