Before the price surge reached $43,000, whales and financial markets were expecting a price collapse, based on indicators from BTC options and futures.
In the eight days that followed January 23, the price of Bitcoin rose by 11% after rebounding from the $38,500 support level.
Many investors were taken aback by the movement, among them the co-founder of the BitMEX exchange, Arthur Hayes. Hayes predicted that risk assets, including Bitcoin, will decline because to the elevated risks of geopolitical upheaval and U.S. inflation increases.
In fact, many traders anticipated a burst in volatility that would drive the price lower before the surge to $43,000 on January 30.
Although Bitcoin was unable to hold the $43,000 support level on January 31, the market has been stable for the past 30 days, suggesting that the initial cause of the decline has been mitigated.
Some analysts argue that the withdrawals from Grayscale’s spot Bitcoin exchange – traded fund (ETF) and the possible selling by customers who would eventually recover their coins from the collapsed Mt. Gox exchange are what caused the fear, uncertainty, and doubt (FUD).
It is worth noting that other spot Bitcoin ETF issuers – including Fidelity, BlackRock and BitWise – have been neutralizing most of the selling pressure from the Grayscale Bitcoin Trust.
Still, Hayes has a valid point in terms of macroeconomics, as the latest U.S. inflation and growth data have caused investors to no longer expect interest rate cuts from the United States Federal Reserve in March.
Further adding to the worries was a Jan. 26 announcement from the U.S. government regarding the sale of 2,934 BTC forfeited from the Silk Road hack, worth nearly $120 million.
Yet, as noticed by analysts, such quantity is not substantial given that the recently launched spot Bitcoin ETFs have been attracting over 4x this amount daily.
Bitcoin’s recent turbulence, attributed to various factors including ETF withdrawals and macroeconomic indicators, underscores the intricate dance between market sentiment and institutional activity, yet reminding us of the vulnerability even among seasoned traders.
Therefore, it is essential to address whether professional traders gained from the price increase.
There is a common belief among cryptocurrency investors that whales and market makers have an edge in predicting significant price changes, giving them the upper hand over retail traders.
This notion holds some truth, as advanced quantitative trading software and strategically positioned servers come into play in short-term trades. However, this doesn't make professional traders immune to substantial financial losses when the market gets shaky.
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You can compare the present leverage demand with the circumstances of January 23 to determine how arbitrage desks and whales are positioned.
Due to the lack of a funding rate, which drives these instruments to trade 5% – 10% higher than conventional spot markets in order to justify the longer settlement period, whales and market makers choose monthly Bitcoin futures contracts.
The difference between two – month contracts and the spot price, or the Bitcoin futures premium, also known as the basis rate, has been between 8.5% and 10% over the last nine days, indicating that those investors were only somewhat bullish.
Pro traders’ optimism causes the BTC futures premium to rise above 10%.
Additionally, in order to determine whether the recent price increase took traders off guard, traders can examine the options markets.
When market makers and arbitrage desks overcharge for upside or downside protection, the 25% delta skew is a clear indicator.
To put it briefly, the skew indicator will increase above 7% if traders predict a decline in the price of Bitcoin, whereas exciting periods typically have a negative 7% skew.
On January 23, the BTC options 25% skew was at an 8.5% negative price expectation; on January 31, it was at a – 5% neutral position.
Essentially, those market makers and whales were expecting a price collapse, but as the $40,000 support level strengthened, they shifted their minds.
Pro traders were unlikely to have predicted the decline to $38,250 and the 11% increase that followed in the next eight days.
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To put it plainly, the recent price increase did not benefit professional traders.
Furthermore, if the rally persists, those traders – who were taken by surprise and are now neutral with regard to the leverage of Bitcoin futures – will probably have to increase their long positions, or purchases.
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