It is possible that many people have already forgotten that Bitcoin (BTC) price closed 2022 at $16,529, and the recent rally and rejection at the $25,000 level could cause concern for some investors. The bears are pushing back towards the $25,000 level and there were several failed attempts at the level between February 16th and 21st. Currently, it looks like the $23,500 resistance continues to gain strength with each retest.
It’s not clear what the reason for Bitcoin’s 45.5% year-to-date gain is, but it stems in part from the United States Federal Reserve’s inability to curb inflation while raising interest rates to their highest level in 15 years. The unintended consequence is higher government debt repayments, increasing pressure on the budget deficit.
It’s virtually impossible to predict when the Fed will change its stance, but with the debt-to-GDP ratio exceeding 128, it shouldn’t take more than 18 months. At some point, the very value of the US dollar could be threatened due to extreme debt.
On February 23, the Fed, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued a joint declaration encouraging US banks that rely on funding from the crypto sector to prevent liquidity leakage by maintaining strict risk management practices. Regulators said the report was prompted by “recent events” in the industry due to increased volatility risks.
Let’s take a look at derivatives metrics to better understand how professional traders are faring in the current market conditions.
Long bitcoin margins were used to defend the $24,000 level
Margin markets provide insight into the position of professional traders as they allow investors to borrow cryptocurrencies to leverage their positions.
For example, exposure can be increased by borrowing stablecoins to buy (long) bitcoin. On the other hand, Bitcoin borrowers can only bet against the (short) cryptocurrency. Unlike futures contractsthe balance between long and short margins is not always the same.
The chart above shows that the OKX trader margin ratio increased between February 21 and 23, signaling that professional traders added leverage in long positions when the price of Bitcoin fell below $24,000.
One could argue that the excessive bullish margin call appears to be a desperation move after the failed attempt to break the $25,000 resistance on February 21st. However, the unusually high margin lending ratio of stablecoins and BTC tends to normalize after traders post additional collateral for a few days.
Options traders are more confident with downside risks
Traders should also analyze options markets to understand whether the recent rally has made investors more risk averse. A 25% delta skew is a clear sign whenever arbitrage tables and market makers are overbidding for upside or downside protection.
The indicator compares similar call (buy) and put (sell) options and will be positive when fear prevails because the premium for protective put options is higher than risky call options.
In short, the skewness metric moves above 10% if traders fear a fall in the price of Bitcoin. On the other hand, general excitement reflects a negative 10% bias.
Note that the 25% delta skew has moved slightly to the negative since February 18 after options traders became more confident and the $23,500 support strengthened. A skewed value of -5% indicates balanced demand between bullish and bearish options.
Derivatives data portray an unusual combination of excessive margin demand for longs and a neutral assessment of risk by options traders. Still, there is nothing to worry about if the stablecoin/BTC ratio returns to sub-30 levels in the coming days.
As regulators put huge pressure on the crypto sector, Bitcoin derivatives are holding up nicely. For example, on February 22, the Director General of the Bank for International Payments, Agustín Carstens emphasized the need for regulation and risk management in the crypto space. The limited impact of the BIS statement on the price is a bullish sign and perhaps increases the likelihood that the price of Bitcoin will exceed $25,000 in the short term.
This article does not contain investment advice or recommendations. Every investment and trading step involves risk and readers should do their own research when making decisions.
The views, thoughts and opinions expressed herein are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
