Pension funds that have bet on the cryptocurrency market over recent years face difficulties navigating the ongoing crash associated with digital assets.
Caisse de dépot et placement du Québec, Canada’s second-largest pension fund, invested $150 million in Celsius Network LLC last October. In July, the crypto lending platform, Celsius, filed for bankruptcy protection because of “extreme market conditions” that prompted a wider selloff.
The Houston Firefighters’ Relief and Retirement Fund bought $25 million worth of Bitcoin and Ether in October last year. Since the announcement, both cryptocurrencies have dropped by more than 50%.
“Of course, we would have preferred otherwise. But volatility and large swings are expected, “said Ajit Singh, the investment chief at Houston Firefighters’ Relief and Retirement Fund investment.
Over the previous two decades, public pension funds have increasingly invested in less-traditional assets in response to low fixed-income.
The recent capital market crash has been painful for investors, especially those who have recently retired or are planning to do so in the next year or two.
The Market Meltdown
Several pension funds and sovereign wealth funds (SWFs) have already invested indirectly in crypto assets through stocks such as Tesla, MicroStrategy, and Coinbase.
California Public Employees’ Retirement System (CalPERS), California’s $441 billion public pension fund, increased the number of its shares in Riot Blockchain, a publicly traded Bitcoin mining firm, in February last year.
In April, a major U.S. asset manager Fidelity Investments in April allowed firms to include Bitcoin investments in their employee 401(k) defined-contribution benefit plans.
Over the two months, important events happened. The global crypto market cap dropped below USD 1 trillion (USD 3 trillion at its peak in October 2021), and the values of cryptocurrencies plunged around 70%.
The plunged values of crypto coins have taken a steep toll on many lending firms and investment funds that deal with those volatile assets. The dreadful incident heightened the risklosings of trust in the indu, creatingeate a downward spiral.
Since the U.S. Federal Reserve and other central banks moved to tighten monetary policy, money has flowed back from digital assets. Bitcoin has lost more than 60% of its value since the end of last year.
Such losses have driven many crypto lenders into bankruptcy or forced them to take drastic steps like freezing withdrawals.
Decentralized finance platforms promising big returns have also suffered heavy losses on some investments, with some hurt by the terra crash.
Pension funds that have bet on the cryptocurrency market over recent years face difficulties navigating the ongoing crash associated with digital assets.
Caisse de dépot et placement du Québec, Canada’s second-largest pension fund, invested $150 million in Celsius Network LLC last October. In July, the crypto lending platform, Celsius, filed for bankruptcy protection because of “extreme market conditions” that prompted a wider selloff.
The Houston Firefighters’ Relief and Retirement Fund bought $25 million worth of Bitcoin and Ether in October last year. Since the announcement, both cryptocurrencies have dropped by more than 50%.
“Of course, we would have preferred otherwise. But volatility and large swings are expected, “said Ajit Singh, the investment chief at Houston Firefighters’ Relief and Retirement Fund investment.
Over the previous two decades, public pension funds have increasingly invested in less-traditional assets in response to low fixed-income.
The recent capital market crash has been painful for investors, especially those who have recently retired or are planning to do so in the next year or two.
The Market Meltdown
Several pension funds and sovereign wealth funds (SWFs) have already invested indirectly in crypto assets through stocks such as Tesla, MicroStrategy, and Coinbase.
California Public Employees’ Retirement System (CalPERS), California’s $441 billion public pension fund, increased the number of its shares in Riot Blockchain, a publicly traded Bitcoin mining firm, in February last year.
In April, a major U.S. asset manager Fidelity Investments in April allowed firms to include Bitcoin investments in their employee 401(k) defined-contribution benefit plans.
Over the two months, important events happened. The global crypto market cap dropped below USD 1 trillion (USD 3 trillion at its peak in October 2021), and the values of cryptocurrencies plunged around 70%.
The plunged values of crypto coins have taken a steep toll on many lending firms and investment funds that deal with those volatile assets. The dreadful incident heightened the risklosings of trust in the indu, creatingeate a downward spiral.
Since the U.S. Federal Reserve and other central banks moved to tighten monetary policy, money has flowed back from digital assets. Bitcoin has lost more than 60% of its value since the end of last year.
Such losses have driven many crypto lenders into bankruptcy or forced them to take drastic steps like freezing withdrawals.
Decentralized finance platforms promising big returns have also suffered heavy losses on some investments, with some hurt by the terra crash.
Customers caught in the meltdown of crypto lending firm Celsius Networks are pleading for their deposits to be paid back.
Hundreds of letters have poured into the judge overseeing the company’s multi-billion-dollar bankruptcy. Such letters are filled with heavy anger, shame, desperations, and regrets.
These letters, which come from across the globe, recount tragic losses of customer funds after Celsius’s frozen withdrawals.
Most letters mentioned the CEO’s AMA (Ask Mashinsky Anything) online chats as key to their trust in him and the platform, which presented itself as safe and stable until days before it froze funds.
A customer, who disclosed having $32,000 in crypto funds deposited in the Celsius platform, wrote to the judge: “Right up until the end, the retail investor received assurance.”
But that changed quickly on June 12 when Celsius froze customer funds to place itself in a better position to honour, over time, its withdrawal obligations. Clients received the news in a message from the firm.
“By the time I finished the e-mail, I had collapsed onto the floor with my head in my hands and I fought back tears,” a man who had about $50,000 in assets with Celsius narrated in his letter.
Another man wrote that he placed $525,000 he obtained from a government loan on Celsius and disclosed he had considered killing himself.
Many customers, who acknowledged being hit hardest by the incident, said they had considered suicidal attempts.
Others also said they experienced excessive stress, lack of sleep, and feeling embarrassed for putting their retirement savings or their children’s college funds into a platform that was much riskier than they never thought of.
Celsius was a private unregulated company that did not come under any requirement for disclosure. The hopes of most clients, like an 84-year-old woman, who put her only $30,000 in crypto savings on Celsius, now lie in the bankruptcy proceedings.
How Celsius Lured Investors
Crypto assets have been hard hit by fears that interest rate hikes will end the era of cheap money. The world’s largest digital asset, Bitcoin, is down more than 56% from this year’s high.
The collapse of the greater crypto ecosystem shows that the days of customers collecting double-digit annual returns on Celsius and some of the above-mentioned crypto firms are over.
Celsius promised big yields as a means to onboard new customers. But this was a big part of what led to its eventual downfall.
Three weeks after Celsius halted all withdrawals because of difficult market conditions, the platform was still advertising annual returns of nearly 19% paid out weekly on its website.
Such promises helped to lure in new users rapidly. As of June, Celsius said it had 1.7 million customers.
Crypto exchange Crypto.com and lending platform BlockFi announced on Monday plans to cut over 400 jobs globally, as they come under pressure from difficult market conditions.
Crypto.com said that it would reduce its workforce by 5%, that is about 260 employees. CEO Kris Marszalek disclosed the announcement via Twitter social media: “Our approach is to stay focused on executing against our roadmap and optimizing for profitability as we do so … That means making difficult and necessary decisions to ensure continued and sustainable growth for the long term by making targeted reductions of approximately 260, or 5%, of our corporate workforce.”
Meanwhile, BlockFi also announced on Monday that it is laying off 20% of its workforce, which is around 170 people. Zac Prince, BlockFi CEO, said in a tweet Monday that the crypto lending firm is reducing its “headcount by roughly 20% and the reduction impacts every team at the company. This decision was driven by market conditions that have had a negative impact on our growth rate and a rigorous review of our strategic priorities.”
Recession Fears
Crypto.com and BlockFi have followed a series of various crypto firms faced with massive layoffs. Late last month, Bitso, one of the biggest crypto exchanges in Latin America, laid off 80 employees due to the recent downturn in the crypto market. Last month, Buenbit, an Argentina-based cryptocurrency exchange, also cut its workforce by 45%.
Earlier this month, Coinbase announced a freeze of its hiring for the foreseeable future and withdrew a number of accepted offers in order to deal with current macroeconomic conditions. Early this month, Bahrain-based crypto exchange Rain Financial Inc and Latin America’s largest crypto exchange 2TM also laid off over a dozen employees as digital asset markets remain red.
Crypto market is experiencing bad days as value of the digital assets plunged below $1 trillion on Monday, triggered by the announcement by Crypto lender Celsius Network that it paused all withdrawals and transfers between accounts, citing “extreme market conditions.”
The latest crypto crash marked the first time since January 2021 when the Bitcoin price fell to a low of $23,750 and the cryptocurrency market has reached as low as $926 billion, according to data site CoinMarketCap. In November 2021, the global crypto market peaked at $2.9 trillion but has been seeing a steady decline this year.
In the past two months, investors have dumped riskier assets amid high inflation and fears that interest rate raises by central banks will hamper growth. Extreme market conditions and central banks’ policy updates are exacerbating the consequences for digital assets.
Bitcoin (BTC) starts a new week with traders still digesting the impact of the last — a major price drop that at one point saw $41,900.
A modest recovery is now competing with some formidable resistance, first of which is $50,000.
As a sense of déjà vu pervades markets, analysts are coming to terms with the fact that the end of Q4 2021 will likely not produce the blow-off top that they had anticipated.
There is also concern that another, deeper, BTC price floor may have to enter before a genuine recovery takes place.
What could happen in the last few weeks of the year? Cointelegraph takes a look at five factors on everyone’s radar for the coming week.
Ranging into “bullish” Q1 2022?
After nearing $50,000 earlier this weekend, BTC/USD is now back around $48,000 — still down 16% in a week.
Against all-time highs of $69,000, the maximum loss overnight on Friday is so far 39% — significant, yet by no means record-breaking in Bitcoin terms.
______ ~40% Corrections 2W RSI Floor Breaks
2013 4 1 (bear confirmed)
2017 7 1 (bear confirmed)
2021 6 0 (excluding Mar 2020) pic.twitter.com/B1nwFEDwKP
— TechDev (@TechDev_52) December 5, 2021
As price predictions dry up, attention is now focusing on a revival into 2022.
“For what it’s worth, my base case is that we consolidate/range till EOY, carve out a regime of mixed-negative funding rates/premium, before bullish Q1,” William Clemente forecast in a Twitter discussion.
A focus when it comes to the sustainability of price recovery will be derivatives markets after their cascade of position liquidations.
Yesterday’s liquidation cascade was the second largest single day event of 2021 in #BTC terms, bested only by the May 19 crash in sheer size. pic.twitter.com/tRKPCJn6J8
— TXMC (@TXMCtrades) December 5, 2021
Friday’s events managed to somewhat “reset” open interest on Bitcoin futures to levels last seen in September at similar price levels to the pit of the dip.
Bitcoin futures open interest chart. Source: Coinglass
New CPI data, new Inflation woes
Macro markets are already on a knife-edge, but this week may add some familiar fuel to the fire in the form of fresh consumer price index (CPI) data.
Due for November, U.S. CPI readings are tipped to outstrip even October’s shock 6.2% year-on-year reading.
Economists’ prognoses were noted by Lyn Alden, financial commentator and founder of Lyn Alden Investment Strategy. She added that housing, a lagging indicator not as present last month, would likely be a factor in the results.
Economists on average expect next week’s CPI print for what happened in November to be 6.7% year-over-year (up from 6.2% in the month prior) and for the month-over-month print to be 0.7% (down from the month prior’s 0.9%). pic.twitter.com/ljOEZQVDBz
— Lyn Alden (@LynAldenContact) December 5, 2021
Inflation already hit the headlines again last week after Jerome Powell, Chair of the Federal Reserve, appeared to imply that “transitory” was no longer an apt description of it.
Bitcoin immediately reacted, and bulls will be keenly eyeing the new CPI data in the hope of a similar knee-jerk response to that from October.
The cryptocurrency, despite recent volatility, is argued to be the best possible workaround for purchasing power protection, not least as inflation is in fact much higher when assets not covered by CPI are factored in.
“Everyone has double-digit inflation if they measure it correctly and needs Bitcoin more than they realize,” MicroStrategy CEO Michael Saylor, a well-known CPI critic in Bitcoin circles, warned late last month.
Central bank money printing, notably by the Fed, meanwhile recently attracted public criticism from the head of another sovereign state.
“Can you guys just stop printing more money? You’re just going to make things worse,” Nayib Bukele, President of El Salvador, responded to Powell’s “transitory” speech.
“Really. It’s a no brainer.”
Mind the gap!
Bitcoin faces a “giant” futures gap this week — one so large that it may not close immediately, but traders should not forget about it, says Cointelegraph contributor Michaël van de Poppe.
With derivatives traders only adding to downside pressure at the weekend, futures may nonetheless form a target for positive momentum.
CME futures closed Friday at $53,545 — a full $5,000 higher than spot price levels at the time of writing.
In line with tradition, BTC/USD may well rise to “fill” that gap, paving the way for at least a reclaim of $50,000 and support and possibly even its $1 trillion market cap.
“There’s going to be a massive CME gap to $53.5K later today,” Van de Poppe forecast Sunday.
“Quite often, like 99% of the time, they close at some point. At least an important level to watch coming weeks if the market continues to bounce for Bitcoin.”
The dip meanwhile succeeded in closing a previous gap to the downside which appeared at the end of November.
“Some minimal movements on the markets during the weekend, but I expect the real volatility to kick in when the weekly opens and the futures for USA launch again,” Van de Poppe added.
Fresh echoes of March 2020 as sentiment hits 5-month lows
Despite being just months after September’s price wobble, last week’s mayhem is drawing the most comparisons to the events of March 2020.
Then, as is now, Coronavirus formed the backdrop to instability, with BTC/USD selling off dramatically in a run that totaled 60% over the course of a single week.
This time around, the stakes were not as high, leading to descriptions of a “mini” re-run this month.
$BTC Is looking like a miniature version of the March 2020 crash so far. pic.twitter.com/KtBGd4K83d
— Daan Crypto Trades (@DaanCrypto) December 5, 2021
One key difference lies in market composition: 18 months ago, leveraged traders and their influence on the markets were a much smaller phenomenon.
“This Bitcoin dip was NOT driven by sentiment,” Danny Scott, CEO of exchange CoinCorner, said in a series of tweets Saturday.
“It was driven by gamblers leveraging and being liquidated. Sentiment is still very Bullish.”
While sentiment remains intact, Scott argues, the timing is serving to upend the positive mood and hopes that 2021 will finish with a boom rather than a bust. March 2020 saw a slow recovery from the lows which only accelerated around eight months afterward.
A look at the Crypto Fear & Greed Index meanwhile highlights the shock among many market participants, with 16/100 marking both “extreme fear” and its lowest score since July.
“The fear hasn’t been so low since May’s crash,” Van de Poppe added about the Index.
“The sentiment is literally comparable to a funeral. I like it.”
Crypto Fear & Greed Index. Source: Alternative.me
Hash rate de facto at all-time highs
One aspect of Bitcoin which is looking anything but bearish? Network fundamentals.
Related: Top 5 cryptocurrencies to watch this week: BTC, ETH, MATIC, ALGO, EGLD
The panic among spot traders and doomsday mainstream press headlines made no dent in Bitcoin’s key network activity, underscoring miners’ long-term perspective.
Even a dip to $42,000 was not enough to compromise performance, and hash rate — a measure of the computing power dedicated to the network — remains near all-time highs.
Highest hashrate since April pic.twitter.com/qYw2htrtVl
— Nico (@CryptoNTez) December 4, 2021
Different estimates give different definitions of what was really the highest-ever Bitcoin hash rate tally.
According to the popular MiningPoolStats resource, hash rate is at its highest-ever sustained levels.
Bitcoin hash rate chart. Source: MiningPoolStats
Blockchain’s seven-day average currently stands at 162 exahashes per second (EH/s), meanwhile, 18 EH/s off the pre-China crackdown record in May.
Bitcoin 7-day average hash rate chart. Source: Blockchain
Regardless, the popular mantra remains that spot price action inevitably follows trends in hash rate.
Difficulty, which keeps Bitcoin in balance regardless of hash rate changes, is now set to increase by just under 1% in six days’ time. Previously, the metric was slated to decline for a second period running.
Volatility is a complex statistical measure commonly used by traders and investors. Those unfamiliar with it will likely attribute some sort of special “standing” to analysts whenever the term is used. However, as shown in a recent comment by Binance exchange founder Changpeng Zhao, most of the time, people are clueless about what volatility means.
Expect very high volatility in #crypto over the next few months.
— CZ Binance (@cz_binance) October 21, 2021
This is not the first time that Zhao has made an incorrect assumption on that topic. In May, Zhao said that volatility was “not unique to crypto,” although multiple sources, including Cointelegraph, showed that excluding Tesla, no S&P 500 stock matched Bitcoin’s (BTC) 70% yearly volatility.
So, what is volatility?
Realized (or historical) volatility measures how large daily price fluctuations are, and higher volatility indicates that the price can drastically change over time in either direction.
This indicator might sound counterintuitive, but lower volatility periods represent a more significant risk of explosive moves. That is partially due to realized volatility being a backward-looking indicator. During quieter periods, traders tend to over-leverage, which then causes larger liquidations during sudden price moves.
The above data displays a 74% average 50-day volatility over the past two years. Historically, the indicator tends to accelerate as it moves above 80%, but there is no guarantee that such a move will occur. Data from February and April 2017 present a counter-argument for this thesis.
Volatility does not differentiate bull and bear markets because it exclusively gauges absolute daily oscillations. Furthermore, by itself, a quiet volatility period is not an indicator of an upcoming dump.
What if Zhao knows something we don’t?
Considering how well-connected the world’s largest crypto exchange founder is, there’s always a possibility that Zhao might have some inside information, but if a person were so sure about an upcoming event, the odds are they would likely know whether the impact is positive or negative. Once again, expecting “high volatility” for the “next couple of months” does not indicate someone has confidence in any direction.
Let’s assume that he is correct, and crypto volatility is about to breach the 100% yearly level. There’s an options strategy that fits this scenario and allows investors to profit from a strong move in either direction.
The reverse (short) iron butterfly is a limited risk, limited profit options trading strategy. It’s important to remember that options have a set expiry date; therefore, the price increase must happen during the defined period.
Profit/Loss estimate. Source: Deribit Position Builder
The prices above were taken on Oct. 25, with Bitcoin trading near $63,000. All options listed are for the Dec. 31 expiry, but this strategy can also be used using a different time frame.
The suggested bullish strategy consists of selling 1.23 BTC contracts of the $52,000 put options while simultaneously selling 0.92 call options with an $80,000 strike. To finalize the trade, one should buy 1.15 contracts of $64,000 call options and another 1.0 contracts of the $64,000 put options.
While this call option gives the buyer the right to acquire an asset, the contract seller gets a (potential) negative exposure. To fully protect from market oscillations, one needs to deposit 0.174 BTC (roughly $11,000), representing the investors’ maximum loss.
The risk to reward is sketchy, so the trader needs conviction
For this investor to profit, one needs Bitcoin’s price to be below $54,400 on Dec. 31, 2021, (down 14%) or above $75,500 (up 19%). The theoretical risk-reward is not good because the maximum payout is 0.056 BTC and the potential loss is over three times that amount.
Nevertheless, if a trader is certain that volatility is right around the corner, a 20% move from $63,000 in 66 days seems feasible. Traders should note that the investor can revert the operation ahead of the options expiry, preferably right after a strong Bitcoin price move. All one needs to do is buy back the two options that have been sold and sell the other two that were previously bought.
The views and opinions expressed here are solely those of theauthorand do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
Derivatives data shows that Ether (ETH) traders are feeling less bullish when compared to Bitcoin (BTC). Even though the altcoin captured a nearly 200% gain in the first half of 2021 versus Bitcoin’s modest 22% price increase, traders seem to be more affected by Ether’s recent underperformance.
Institutional flow also backs the decreased optimism seen in Ether derivatives, as ETH investment vehicles suffered record outflows this past week while Bitcoin flows began to stabilize. According to data from CoinShares, Ether funds experienced a record outflow of $50 million this past week.
Ether (orange) versus Bitcoin (blue) prices. Source: TradingView
Take notice of how Ether is underperforming Bitcoin by 16% in June. The London hard fork is scheduled for July, and its core proposal — dubbed as EIP-1559 — will cap Ethereum’s gas fees. Therefore, the price action could be related to unsatisfied miners as the network migrates out of Proof-of-Work (PoW).
For this reason, Ether investors have reason to fear because uncertainties abound. Perhaps miners supporting a competing smart-contract chain or some other unexpected turn of events could further negatively impact Ether price.
Whatever the rationale for the current price action, derivatives indicators are now signaling less confidence when compared to Bitcoin.
Ether’s December futures premium shows weakness
In healthy markets, the quarterly futures should trade at a premium to regular spot exchanges. In addition to the exchange risk, the seller is ‘locking up’ funds by deferring settlement. A 4% to 8% premium in the December contracts should be enough to compensate for those effects.
A similar effect occurs in almost every derivatives market, although cryptocurrencies tend to present higher risks and have higher premiums. However, when futures are trading below this range, it signals that there is short-term bearish sentiment.
OKEx BTC (blue) vs. ETH (orange) December futures premium. Source: TradingView
The above chart shows the Bitcoin December futures premium recovering to 3.5% while Ethereum contracts failed to follow. While both assets displayed a neutral-to-bearish indicator, there’s evidence that the altcoin investors are less optimistic about a short-term recovery.
Related:Key Bitcoin price indicator flashes its ‘fifth buy signal in BTC history.’
Another leg down will do even more harm to altcoins
Another thesis that could negatively impact Ether’s premium is the impact of a potential negative 30% performance from Bitcoin. Filbfilb, an independent market analyst and the co-founder of the Decentrader trading suite, said that a 30% crash in the Bitcoin could prompt altcoins to drop twice as hard.
Clem Chambers, the chief executive of the financial analytics website ADVFN, also predicted another potential leg down, which would repeat the late-2018 crypto winter period. Chambers claims Bitcoin could capitulate and fall back towards $20,000.
While the overall market sentiment is neutral-to-bearish, it seems sensible to predict a more daunting scenario for Ether, including uncertainties from the transition to Proof-of-Stake (POS).
The views and opinions expressed here are solely those of theauthorand do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
Perpetual contracts, also known as inverse swaps, have an embedded rate usually charged every eight hours. This fee ensures there are no exchange risk imbalances.
Even though buyers’ and sellers’ open interest is matched at all times, leverage can vary, and when buyers (longs) are demanding more leverage, the funding rate turns positive. Thus, they are the ones paying the fees to the sellers (shorts).
However, the opposite situation occurs when shorts require additional leverage, and this causes the funding rate to turn negative.
The Bitcoin (BTC) futures funding rate has been negative since May 18 (37 days), and this situation indicates buyers’ lack of appetite for leverage longs.
Historically, this indicator shifts between 0% and 2% per week, although it might sustain higher levels for months during bull runs. On the other hand, a negative funding rate enduring more than a couple of days used to be uncommon.
However, 2020 provided a different picture as Bitcoin faced an extreme price correction in mid-March, taking 60 days to retake the $9,300 support. Another nosedive took place in early September as the price stalled from $12,000, and it would only recover after 50 days later.
Bitmex BTC futures weekly funding rate in 2020. Source: TradingView
Take notice of how the weekly funding rate for March to November 2020 was mostly negative, indicating that sellers (shorts) were demanding more leverage. The current situation resembled these periods in 2020, and some investors correlate a negative funding rate with buying opportunities.
Related:Data shows derivatives had little to do with Bitcoin’s drop to $29K
Ki-Young Ju, the CEO of on-chain analytics resource CryptoQuant, has shown how historically, a low funding rate “could be a buy signal.”
In this spot-driven & up-only market, a low funding rate could be a buy signal.
It seems not a good idea to wait for a correction when institutions buying $BTC.
However, this analysis framed almost exclusively a massive bull run where Bitcoin price soared from $11,000 to $34,300. Furthermore, at what point should one open a position if a negative funding rate can last for 60 days?
Cointelegraph previously showed how combining the funding rate indicator with the futures basis rate provides a better analysis of how professional traders are positioned. The annualized basis is measured by the price gap between fixed-month futures and regular spot markets.
As depicted above, calling the bottom on the basis indicator right now could be premature because it has been bouncing near 0% since June 18.
Right now, it is impossible to estimate the timing or trigger that will cause buyers to gain confidence and finally bring the futures market premium back to 10%.
For traders trying to ‘catch the falling knife,’ a better strategy could be adding 25% of the long position now and scale bids every $2,000 below the $30,000 resistance.
The views and opinions expressed here are solely those of theauthorand do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
After an incredible start in 2021, Ether peaked at $4,380 on May 12 but has dropped 55% since then. Unlike the leading cryptocurrency, the Ethereum network faces competition from projects that do not depend on proof-of-work, hence not facing the bottleneck issues that caused transaction fees to skyrocket.
Whenever markets disappoint traders with a negative surprise, traders quickly seek external explanations for their failure to interpret signals. But, in reality, a clear indication that China was concerned about the crypto mining energy consumption came out on April 30, six weeks ahead of the initial price crash.
On May 6, recently confirmed U.S. Securities and Exchange Commission chair Gary Gensler punted to congress on providing more regulatory oversight to the crypto space. However, in defense of excessively optimistic investors, similar promises have circulated for over four years.
Regardless of the many reasons behind the recent negative market performance, traders like to blame someone for their mistakes, and what better scapegoat than derivatives markets?
Cointelegraph was the first news outlet to analyze the $2.5 billion Bitcoin futures expiry, potentially giving bears a $450 million lead if the price fails to hold $32,000 on June 25. On June 12, Cointelegraph said that Ether’s $1.5B monthly options expiry would be a make-or-break moment, as 73% of the neutral-to-bullish options would be worthless below $2,200.
Updated open interest figures show a $1.36 billion open interest for Ether options and another $500 million worth of futures contracts to expire on Friday. Meanwhile, Bitcoin’s options open interest has grown to $2.64 billion, while another $1.44 billion is set to expire in futures markets.
To understand whether derivatives markets, mainly the quarterly expiries, hold such a significant impact on prices, investors need to evaluate the past expiries.
December 2020 and March 2021 reflect diverging movements
In November 2020, Bitcoin initiated a strong rally, accumulating 75% gains ahead of the December expiry.
Bitcoin price on Dec. 2020 and Mar. 2021 expiries. Source: TradingView
Over 102,000 Bitcoin options matured on Christmas day, but there was no apparent impact. Instead, the bull trend continued as Bitcoin subsequently rallied another 69% in 12 days.
March 2021, on the other hand, showed completely different price action. Bitcoin price plunged 14% ahead of the options expiry, although it fully recovered over the next four days.
It is worth noting that on March 22, the U.S. Federal Reserve Chair Jerome Powell said, “Bitcoin is too volatile to be money” and “backed by nothing.”
In that same week, billionaire fund manager Ray Dalio raised concerns on a possible “U.S. Bitcoin ban.”
March, June, and September 2020 showed no signs of a dump ahead of expiry
If March 2021 could have built a possible case for dumping activity ahead of expiry, the previous year faced an opposite movement.
Bitcoin price on March, June, and Sep. 2020 expiries. Source: TradingView
Bitcoin went on a 31% bull run in the ten days leading to the March 26, 2020 expiry. However, an 11% correction took place the following day, therefore potentially building a case for investors to cite ‘manipulation.’ However, the 45% hash rate drop that surrounded the date partially explains the sell-off.
The June 26 expiry did not seem to significantly impact price because Bitcoin dropped 2% before the event and another 2% over the next two days. However, an exact inverse pattern occurred on the September 2020 expiry when Bitcoin hiked 2% ahead of Sept. 25 and continued to increase by 2% over the following two days.
Options and futures expiries cannot be deemed bearish or bullish
As the data from the previous five quarterly expiries show, there is absolutely no indication of a pump and dump (or inverse) movement ahead of the derivative events.
For investors and traders waiting for a bottom confirmation, the answer probably lies in Bitcoin’s hash rate recomposition.
One should also account for Chinese over-the-counter traders re-establishing their fiat gateways after the recent nationwide ban on cryptocurrency transactions.
Bitcoin price has slightly recovered from its sharp dip below $29,000, but generally, the past month has not been generous to BTC and Ether (ETH). Bitcoin has failed to break the $40,000 resistance multiple times, and the recent dip to a six-month low at $28,800 was a startling sign for many investors.
The views and opinions expressed here are solely those of theauthorand do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
After a brief recovery to $41,000 on June 14, Bitcoin (BTC) investors might have thought that the bear market was finally over. After all, it was the highest level since May 21 and the date that MicroStrategy (MSTR) announced a successful $500 million debt offering.
The funds are usually available in one or two business days, and the proceeds would be used to acquire even more Bitcoin for the business intelligence company’s balance sheet. MicroStrategy followed this fund-raise with another surprise filing to sell up to $1 billion of its stock to buy even more Bitcoin.
However, a 30% drop took place over the following week, causing Bitcoin to reach its lowest level since January 22. The $28,800 bottom might have lasted less than fifteen minutes, but the bear sentiment was already established.
The sell-off was largely attributed to Chinese miners’ capitulating after they were forced to abruptly shut down their operations. Furthermore, on June 21, an official People’s Bank of China (PBoC) reiterated that all banks and payment institutions “must not provide account opening or registration for [virtual currency]-related activities.”
The open question is whether derivatives played a vital part in the correction or at least displayed stress signs that may indicate an even more dangerous second leg down?
The futures premium showed no signs of backwardation
The futures premium (or basis) measures the gap of longer-term futures contracts to the current spot (regular markets) levels. Whenever this indicator fades or turns negative, this is an alarming red flag. This situation is also known as backwardation and indicates a bearish sentiment.
Huobi 3-month Bitcoin futures basis. Source: Skew
Futures should trade at a 5% to 15% annualized premium in healthy markets, otherwise known as contango. On the worst moment on June 22, this basis bottomed at 2.5%, which is considered bearish but not enough to trigger any red flag.
There was zero panic from top traders
The top traders’ long-to-short indicator is calculated using clients’ consolidated positions, including spot, margin, perpetual and futures contracts. This metric gathers a broader view of professional traders’ effective net position.
Derivatives exchanges’ top traders long-to-short ratio. Source: Bybt
Despite the discrepancies between crypto exchange methodologies, analyzing changes over time provides valuable insights. Top traders at Binance, for example, increased their long positions relative to shorts on June 22.
At Huobi, there has been some increase in their net short exposure, but nothing out of the ordinary as the indicator reached the same level two days before.
Lastly, OKEx top traders reduced their longs on June 20 and have since kept a 0.80 level favoring shorts by 20%.
Long futures liquidations were less than $600 million
Those unaware of the price swing would never have guessed that Bitcoin traded below $29,000 based on futures liquidations data.
Aggregate futures liquidations (longs in red). Source. Coinalyze.net
Less than $600 million in longs were liquidated on June 22, lower than the previous day’s $750 million figure. Had longs been overleveraged, a 20% drop in less than two days would have triggered stop orders of a much greater size.
Data show no current signs of stress from longs or a potential negative swing caused by derivatives markets.
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