Bitcoin’s 51.4% crash in March 2020 was the most terrifying 24-hour black swan event in digital asset history. Last week’s recent price activity likely resurrected similar emotions for investors who witnessed the Black Thursday crash.
Over the past week, the price of Bitcoin (BTC) fell 29%, hitting a three-month low of $ 42,150. Long-term contracts worth $ 5.5 billion were liquidated, which is undoubtedly a record high in absolute terms. However, the impact of the March 2020 crash on derivatives was orders of magnitude greater.
To understand why the current correction is less severe than the one in March 2020, let’s first analyze the premium for perpetual futures. These contracts, also known as inverse swaps, are adjusted every eight hours so that price differences to traditional spot markets can be easily eliminated.
In moments of panic, price differences sometimes arise because of concerns about the liquidity of the derivatives exchange or market makers cannot participate in times of extreme volatility.
On March 12, 2020, the Bitcoin Perpetual Futures triggered a much larger drop than the price on spot exchanges. This move is partly due to the cascading liquidations that have left a backlog on large sell orders where liquidity could not be found at reasonable prices.
The aftermath of the bloodbath meant that futures contracts were traded at a discount of 12% compared to regular spot exchanges. BitMEX, the largest derivatives market at the time, went offline for 25 minutes and wreaked havoc as investors grew suspicious of its liquidity conditions.
If you compare this event with last week, you will find that sustained price differences are very unusual. There is no transient 12% gap even during the most volatile hours.
Notice how the perpetual contracts hit a peak discount of 4% on regular spot exchanges on May 13th, even though it took less than five minutes. Market makers and arbitrage desks could have been unprepared, but they quickly regained liquidity by buying the perpetual contracts at a discount.
To understand the impact of these crashes on professional traders, the 25% delta offset is the best metric as it compares prices for similar call (buy) and put (sell) options. When market makers and whales fear that Bitcoin’s price could crash, they are demanding a higher premium for the neutral to bearish put options. This movement causes the delta offset of 25% to shift positively.
The graph above shows the staggering 59% delta skew for one month in Bitcoin options in March 2020. This data shows absolute fear and the inability to evaluate the put (sell) options, causing bias. Even excluding the intraday peak, the 25% delta offset showed sustained periods over 20, indicating extreme “fear”.
Last week the skew indicator hit a high of 14%, which is not far from the “neutral” range of -10% to + 10%. It is indeed a notable difference from the negative offset of the previous months, which suggests optimism, but nothing out of the ordinary.
Although the recent drop in prices of 29% in seven days could have been devastating for traders using leverage, the overall impact on derivatives has been small.
This data shows that the market has been incredibly resilient lately, but that strength could be tested if Bitcoin’s price continues to fall.
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