Bitcoin (BTC) has a long history of forming local peaks when events occur that are anticipated by the market. The recent launch of the Bitcoin exchange-traded fund (ETF) on October 19 was no different and led to a 53% monthly rally to an all-time high of $ 67,000.
Now that the price has briefly dipped below $ 60,000, investors are trying to understand whether the 10% correction was healthy short-term profit-taking or the end of the bull run. To determine this, traders need to analyze BTC's previous price activity to assess potential similarities.
The graphic above shows the day a New York Times headline announced that "Bitcoin receives a cautious nod from China's central bank"in November 2013. At the time, Yi Gang, the deputy governor of the People's Bank of China (POBC), said that people could freely participate in the Bitcoin market. He even mentioned a personal opinion that suggested a constructive long-term outlook. about digital currency.
It is also worth mentioning that this favorable media coverage on Chinese state television aired on October 28 and showed the world's first Bitcoin ATM in Vancouver.
Bearish events can also be anticipated
Bearish examples can also be found throughout Bitcoin's 12-year price action. For example, the Chinese ban in April 2014 marked a 5-month low price.
On April 10, 2014, Huobi and BTC trading, the two largest exchanges in China, said their business accounts at certain domestic banks would be closed within a week. One more time, rumors had been circulating since March 2014, and this was prompted by a note in the Chinese media outlet Caixin.
Most recent events included CBOE Bitcoin futures release on December 19, 2017, which preceded the infamous all-time high of $ 20,000 by one day. Another event that marked a local top was the Coinbase IPO on Nasdaq when the price of Bitcoin hit $ 64,900. Both events are noted in the following table:
Notice how all of the above events were highly anticipated, although some did not have a precise announcement date. For example, the initial Bitcoin futures-based ETF trading session on October 19 was preceded by the statement by SEC Chairman Gary Gensler on August 3 that the regulator would be open to accepting a BTC ETF application using CME derivative instruments.
Investors may have positioned themselves previously prior to the launch of the ProShares Bitcoin Strategy ETF and a look at the BTC derivatives markets could possibly provide more insight on this.
The futures premium was not "exaggerated"
The futures premium, also known as the base rate, measures the price gap between the prices of futures contracts and the regular spot market. Quarterly futures are the preferred instruments of the whales and the arbitration tables. Although it may seem complicated for retailers due to its settlement date and the price difference from the spot markets, its most significant advantage is the lack of a fluctuating financing rate.
Some analysts have pointed to the "return of contango" after the bais rate reached 17%, which was the highest level in 5 months.
- Dylan LeClair (@DylanLeClair_) October 20, 2021
In a normal situation, futures markets of any type (soybeans, S&P 500, WTIl) will trade at a price slightly higher than the regular spot market. That happens mainly because the investor needs to wait until the contract expires to collect their payment, so there is an opportunity cost built in and this causes the premium.
Suppose one conducts arbitrage operations, with the aim of maximizing the funds held in USD. This trader could buy a stablecoin and get a 12% annualized return using decentralized finance (DeFi) or centralized crypto loan services. A 12% premium in the Bitcoin futures market should be considered a 'neutral' rate for a market maker.
Excluding the short-lived spike of 20% on October 21, the base rate remained below 17% after a 50% rally so far this month. For comparison, on the eve of the Coinbase share launch, the futures premium shot up to 49%. Therefore, those who name the current scenario as somehow overly optimistic are simply wrong.
Liquidation risks were not "imminent" either.
Whenever buyers are overconfident and accept a high premium for leverage through futures contracts, a 10-15% price drop could trigger cascading sell-offs. However, the mere presence of an annualized premium of 40% or more does not necessarily translate into an imminent downside risk because buyers can add margin to keep their positions open.
As the leading derivatives metric shows, a 10% drop from the all-time high of $ 67,000 on October 20 was not enough to cause any sign of concern from professional traders, as the base rate remained at a level. healthy 12%.
The views and opinions expressed here are solely those of the Author and do not necessarily reflect the views of Cointelegraph. Every investment and trade movement involves risk. You should do your own research when making a decision.
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