bitcoin

Fed’s Hawkish Comments and Bitcoin Derivatives Data Point to Further Lower BTC


A $750 pump on August 26 took Bitcoin (BTC) from $21,120 to $21,870 in less than two hours. However, the move was completely erased after comments from US Federal Reserve Chairman Jerome Powell reiterated the bank’s commitment to containing inflation by tightening the economy. After Powell’s speech, the price of BTC dropped to $20,700.

Price Bitcoin / USD 30 minutes. Source: Trading View

In Jackson Hole, Powell specifically mentioned that “the historical record strongly cautions against a premature relaxation of politics.” Immediately after these remarks, the American stock indices reacted negatively, the S&P 500 falling by 2.2% within the hour.

On the Bitcoin chart, the affable “Bart candle,” a reference to the shape of Bart Simpson’s head and a descriptor of BTC’s rising and falling price action, has surfaced. Apart from these unpredictable technical analysis indicators, there are other indicators that indicate Bitcon’s broader neutral to bearish sentiment.

Regulators Accelerate Pace of Crypto Legislation

The news flow for cryptocurrencies has been negative for some time and this is also weighing on investor sentiment. On August 24, the U.S. Federal Deposit Insurance Corporation (FDIC) sent cease and desist letters to five companies for allegedly making false statements about deposit insurance related to cryptocurrencies, including FTXUS.

On August 25, India-based cryptocurrency exchange CoinSwitch had its premises raided by anti-money laundering officers for alleged violation of forex laws. Launched in India in 2020, CoinSwitch has successfully raised capital from Coinbase Ventures, Andreessen Horowitz, Sequoia, and Tiger Global.

Finally, on August 26, the United States Securities and Exchange Commission postponed a decision regarding a Bitcoin exchange-traded fund (ETF) by global investment firm VanEck. Even though the chances of approval were low, it bolstered the regulator’s anti-crypto sentiment.

Consequently, crypto investors face continued uncertainty despite the seemingly helpful inflationary scenario, which should favor supply-capped assets. For this reason, crypto derivatives analysis is key to understanding whether investors have priced the higher probabilities of a downturn.

Professional traders were neutral to bearish ahead of the dump

Retail traders generally avoid quarterly futures because of their price difference from spot markets. Yet they are preferred instruments by professional traders because they avoid the perpetual fluctuation in funding rates that often occurs in a contract.

Annualized 3-month Bitcoin futures premium. Source: Laevitas

In healthy markets, the indicator should trade at an annualized premium of 4% to 8% to cover the associated costs and risks. Yet, this has not been the case as the Bitcoin futures premium has remained below 1.8% the entire time. This data reflects the reluctance of professional traders to add leveraged long (bullish) positions.

Related: CME Bitcoin Futures See Record Discount Amid ‘Very Bearish Sentiment’

It is also necessary to analyze the Bitcoin options markets to exclude externalities specific to the futures instrument. For example, the 25% delta skew is a telltale sign when market makers and arbitrage desks are overcharging for upside or downside protection.

Bitcoin options 30 days 25% delta skew: Source: Laevitas

In bear markets, option investors give higher odds for falling prices, causing the bias indicator to rise above 12%. The 30-day delta bias has been near the neutral-to-bearish threshold since Aug. 22, signaling that options traders were less inclined to offer downside protection.

These two derived metrics suggest that Bitcoin’s August 26th price plunge could have followed traditional stock market performance, but crypto traders certainly weren’t expecting a positive development.

The derivatives data leaves no room for bullish interpretations as sentiment deteriorated after Powell’s comments and further indicates weakening market conditions.

The views and opinions expressed herein are solely those of the author and 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.