This week Bitcoin (BTC) rose to a 2023 high of $23,100 and the move followed a notable recovery in traditional markets, especially the tech-heavy Nasdaq Composite Index, which gained 2.9% on Jan. 20.
Economic data continues to raise investor hope that the US Federal Reserve will reduce the pace and duration of interest rate hikes. For example, existing home sales fell 1.5% in December, the 11th consecutive drop after high US mortgage rates severely affected demand.
On January 20, Google announced that 12,000 workers were laid off, more than 6% of its global workforce. Bad news continues to trigger risky buying activity, but Dubravko Lakos-Bujas, chief US equity strategist at JPMorgan, expects weaker earnings guidance to "put downward pressure" on the market of values.
Fears of a recession mounted on January 20 after Federal Reserve Governor Christopher Waller said a mild recession should be tolerated if it meant lowering inflation.
Some analysts have linked Bitcoin gains to digital currency group File for Chapter 11 bankruptcy protection, which allows Genesis Capital to pursue debt reorganization and business activities. But more importantly, the move reduces the risk of a forced sale of Grayscale Investments' assets, including the $13.3 billion Grayscale GBTC trust fund.
Let's look at derivatives metrics to better understand how professional traders are positioning themselves in current market conditions.
Bitcoin margin longs fell after the pump to $21,000
Margin markets provide information on how professional traders are positioning because it allows investors to borrow cryptocurrencies to take advantage of their positions.
For example, one can increase exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only short the cryptocurrency as they are betting on its price going down. Unlike futures contractsthe balance between long and short margins is not always the same.
The chart above shows that OKX traders' margin lending ratio increased from January 12 to 16, indicating that professional traders increased their leverage longs as Bitcoin gained 18%.
However, the indicator reversed its trend as excessive leverage, 35x for buying activity on January 16, eased back to neutral to bullish on January 20.
Currently at 15, the metric favors stablecoin borrowing by a wide margin and indicates that shorts are not confident in building bearish leveraged positions.
Still, this data does not explain whether professional traders became less bullish or decided to reduce their leverage by depositing additional margin. Therefore, one must analyze the options markets to understand if the sentiment has changed.
Options traders are neutral despite recent rally
The 25% delta bias is a telltale sign when arbitrage desks and market makers overcharge for upside or downside protection.
The indicator compares similar call and put options and will turn positive when fear prevails because the protective premium on put options is higher than risky call options.
In short, the bias metric will move above 10% if traders fear a Bitcoin price drop. On the other hand, the general enthusiasm reflects a negative bias of 10%.
As shown above, the 25% delta bias hit its lowest level in over 12 months on January 15. Options traders were finally paying a premium for bullish strategies rather than the other way around.
Related: Genesis bankruptcy case scheduled for first hearing
Currently at minus 2%, the delta bias indicates that investors are pricing similar odds for bullish and bearish cases, which is somewhat less optimistic than expected considering the recent rally towards $22,000.
The derivatives data puts the bull case in check, as buyers using the stablecoin's margin significantly reduced their leverage and options markets are pricing in similar risks for both sides. On the other hand, the bears have not found a level where they feel comfortable going short by borrowing Bitcoin in the margin markets.
Traditional markets continue to play a crucial role in setting the trend, but Bitcoin bulls have no reason to fear as long as derivatives metrics remain healthy.
The views, thoughts and opinions expressed here are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
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