Bitcoin’s (BTC) sharp decline of 26% from its all-time high of $ 58,300 on Feb.20 made the market a bit bearish, but technically this was purely psychological as the digital asset held the $ 43,000 support with ease . This downward move caused indicators like the Crypto Fear & Greed Index to hit 38, their lowest level in five months.
While a downward move of $ 15,400 may seem unusual, there were six 25% and even larger corrections made during the 2017 bull run. When BTC first hit an all-time high of $ 42,000 on January 8, it saw a negative increase of 31.5% to $ 28,750 over the next two weeks.
When Bitcoin tried to bottom out, derivative contracts eliminated any bullish signal and temporarily displayed worrying data. For example, open positions in futures fell 22% after hitting a high of $ 19.1 billion on February 21.
As shown above, BTC futures open positions decreased 22% after taking into account the impact of the month-end expiration. Though significant, the remaining $ 14.9 billion is still 44% higher than the previous month’s data.
Derivatives indicators remained stable, suggesting a healthy market
By measuring the premium of the futures contracts at the current spot level, one can infer whether professional traders are bullish or bearish. Typically, the markets should show a slightly positive annual rate, a situation known as contango.
Although the premium on 1-month futures contracts weakened from the ultra-bullish rate of 6% in mid-February, it managed to maintain levels above 1.2%. The annualized equivalent is a peak of 70% versus the current rate of 17%. Hence, the futures contract premium indicates that undue leverage from buyers has been eliminated, but we are nowhere near a bear market.
Meanwhile, the BTC option markets the 25% delta offset, which measures how prices are valued from neutral to bullish than comparable bearish puts.
The indicator serves as an indicator of fear and greed among options traders and was down 5% as of Feb.21, which means that upside protection was more expensive. Over the past week, the 25% delta offset moved into a neutral zone that was last seen almost five months ago.
This further confirms that market makers and top traders are not in despair as signs of over-optimism are wiped out in January.
The lack of fearfulness during a crash is a good signal
As institutional investors continue to flock to the room, Bitcoin’s volatility tends to have less of an impact on derivatives markets. To illustrate this new situation, both the BTC futures and options market indicators did not show any red flags despite the 26% price drop.
Bitcoin’s positive news flow and institutional investor interest are likely to remain unscathed after the last retest of $ 43,000. As companies and mutual funds accumulate Bitcoin and instead view dips as catastrophic, these moves should be interpreted as buying opportunities.
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