Welcome to the Bitcoin Wild West
The past few months saw Bitcoin trading at a surprisingly chill vibe, but if there’s anything history teaches us, it’s that volatility is the name of the game for cryptocurrencies. Just recently, between August 15 and August 18, Bitcoin decided to throw a tantrum, correcting a whopping 11.4% from $29,340 to $25,980. Surprise! It feels like the cryptocurrency world is that one roller coaster you rode with friends, and halfway through, you realize you’ve lost your lunch.
What Happened to Market Liquidity?
Experts are throwing around the term reduced liquidity as the culprit for this recent rollercoaster ride. But can we really blame it all on the slim pickings of liquidity? Sure, Bitcoin surged over 70% in 2023, but we can’t ignore the “Alameda gap,” the infamous liquidity gap left by the collapse of Alameda Research. It still seems to be hanging around like a bad smell.
Diving into the Depths of the Derivatives Market
Let’s slip into something more comfortable—like the derivatives market. When Bitcoin made its steep descent to $26,000, it’s only fair we peep through the window what our friendly neighborhood whales and market makers are really thinking. To spice things up, we’ll take a detour down memory lane to find similar thrill rides from the recent past.
- March 8-10: Bitcoin dropped 11.4% to $19,600 after Silvergate Bank bit the dust.
- April 19-21: A smaller 10.4% dip back to $27,250 after our buddy Gary Gensler sent shivers with his regulatory speeches.
The Premium Puzzle: Bitcoin Futures Explained
In the land of futures, things aren’t always what they seem. Generally, we see a contango—meaning futures trade at a premium because sellers want a little extra hedging in their favor. But during that March crash, Bitcoin futures went from a comfortable 3.5% premium all the way back to a discount of 3.5%, signaling pure pessimism. Fast-forward to April, and our futures market stood resilient, holding onto that 3.5% premium.
Contrast this with the 11.4% dip last month — that futures premium started at over 5% and quickly jumped back to 6% once the dust settled. Whales and market makers are still keeping the optimism alive like a late-night infomercial for kitchen gadgets.
Options Markets: The Silent Observer
Next phase: the options markets want in on the action! If traders expect a drop, the delta skew metric usually leaps up above 7%. Conversely, if optimism shines down like a morning sun, we see skew jumping from positive to a negative below -7%. Pre-August 15, the demand for call options was higher than a kite at a summer picnic with the indicator sliding down to a comfortable -11%.
Wrapping Up the Story
So what’s the verdict? Both Bitcoin futures and options are giving off vibes of confidence more than concern. While that doesn’t mean a quick return to $29,000 is inevitable, it does suggest the chances of an extended price correction seem lower than your chances of running into your old English teacher at the grocery store.
