It is not yet known whether the latest news from Binance about the temporary lockdown on the UK financial system is the main reason behind Bitcoin’s (BTC) price drop today. As Cointelegraph reported, the exchange sent e-mails to affected customers, but did not provide any details.
Regardless of the reason for the weakness, derivative contracts have shown some oddities and this could be a worrying sign.
Quarterly Bitcoin futures are the preferred instruments of whales and arbitrage desks. While it may seem complicated to retailers because of their settlement dates and the difference in price to the spot markets, their biggest advantage is the lack of a fluctuating funding rate.
Typically, when traders opt for perpetual contracts (inverse swaps), a fee is charged every 8 hours, which changes depending on which side requires more leverage. On the other hand, contracts with a fixed term are usually traded at a premium on regular spot market exchanges.
This effect occurs when sellers postpone billing and therefore demand compensation for this time.
As shown above, the September 24th contract is trading at an annualized premium of 2.2% on Deribit, while the December 31st contract is trading at 3.8%. This curve is exactly what to expect in healthy markets, as a longer settlement period usually results in sellers charging a higher premium.
Remember that there is a decent “cash and carry” activity involved in arbitrage desks buying Bitcoin while shorting (selling) the futures contract. These players are not effectively betting on a negative price swing as their net exposure is unchanged, but this activity limits the premium on futures contracts.
Connected: Bitcoin price has gone down, but here are 3 reasons why $ 1 billion liquidations are less common
Concentrate on the bigger picture, is the 3-month premium below 4%?
Therefore, some exchanges with a flat or slightly inverted futures curve should not be interpreted as a bearish indicator. More importantly, investors should measure the 3 month futures premium, which should stay above 4% annualized.
Whenever this metric falls below this, this indicates a lack of interest in leverage longs and is interpreted as bearish.
Right now, the average September annualized base (premium) of the four exchanges surveyed is 3.3%, which is definitely worrying.
However, this is not uncommon after the market has seen a 50% correction. This situation should be interpreted simply as a lack of buyer confidence rather than an alarming downward signal.
The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risks. You should do your own research when making a decision.