BTC margin and option markets show no signs of discomfort or overconfidence despite 28% gains in two days.
The price of Bitcoin (BTC) increased by 28% between March 12-14, reaching $26,500, its highest level since June 2022. Some may attribute the gains to the consumer price index’s (CPI) 6% year-over-year increase in February, even though the figure was in line with expectations.
The inflation metric reached its lowest level since September 2021, which is a positive development, but it does not validate the Federal Reserve’s attempt to reduce the metric to 2%. Most likely, risk markets, such as stocks and cryptocurrencies, soared after regional bank stocks recovered from their March 13 lows.
At 10:30 a.m. Eastern Time, First Republic Bank (FRC) shares were trading 54% higher, followed by Western Alliance Bancorporation (WAL) gaining 46% and KeyCorp (KEY) gaining 15%. The 30-year average mortgage rate decreased to 6.6% from 7.1% on March 7. Consequently, reduced mortgage rates have the potential to improve the housing market, which partially explains the rally.
The unexpected decline in mortgage rates may present an opportunity for price-sensitive homebuyers and homeowners waiting for a chance to lock in a lower rate. According to data from Realtor.com, a buyer of a median-priced home still faced a monthly mortgage payment that was 49% higher than it was one year prior.
Despite the possibility of a recession in the United States due to high interest rates, China’s economic outlook remains positive. Li Qiang addressed reporters on March 14 for the first time since assuming the position that oversees the State Council, China’s highest executive body. According to Qiang, non-state-owned enterprises in China will have greater room for development.
Let’s look at derivatives metrics to better understand how professional traders are positioned in the current market conditions.
Bitcoin margin markets signaling a market deficiency
Margin markets provide insight into how professional traders are positioned because it allows investors to borrow cryptocurrency to leverage their positions.
For example, one can increase exposure by borrowing stablecoins and buying Bitcoin. On the other hand, borrowers of Bitcoin can only take short bets against the cryptocurrency.
OKX stablecoin/BTC margin lending ratio. Source: OKX
Since March 13, OKX traders’ margin lending ratio has been above 35, indicating a significant mismatch in favor of Bitcoin longs. Readings above 40 are uncommon and driven by a high stablecoin borrowing cost of 25% per year.
One should refer to the BTC option markets to confirm whether professional traders are effectively expecting further price increases.
Options traders are far from excited
Traders should also analyze options markets to understand whether the recent correction has caused investors to become less risk-averse. The 25% delta skew is a telling sign whenever arbitrage desks and market makers overcharge for upside or downside protection.
The indicator compares similar call (buy) and put (sell) options and will turn positive when fear is prevalent because the premium for protective put options is higher than the premium for risk call options.
In short, if traders anticipate a Bitcoin price drop, the skew metric will rise above 8%, and generalized excitement has a negative 8% skew.
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Bitcoin 60-day options 25% delta skew: Source: Laevitas
On March 13, when Bitcoin broke above the $22,000 resistance level, the BTC options’ main risk gauge exited the fear zone that had been in place for three days. As options traders assigned the same risk assessment to bullish and bearish strategies, the 25% delta skew entered a neutral zone.
However, it would be incorrect to conclude that the negative 5% skew seen briefly on March 14 indicates excessive optimism or bullishness. Analysts and pundits frequently jump the gun and celebrate quick reversions, but anything between -8% and +8% remains in the neutral zone.
According to the pricing of options contracts, derivatives data indicates that professional traders maintained their long positions using margin markets and exited their bearish stance on March 13. Given the improvement in macroeconomic market conditions, Bitcoin bulls are well-positioned to drive the price above $26,000.
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