The recent 11.4% correction in Bitcoin’s price from $29,340 to $25,980 between August 15 and August 18 has raised questions about the state of the cryptocurrency market.
As Bitcoin traders adjust to its volatility, experts examine whether the reduced liquidity has truly driven recent spikes in price swings.
Historically, Bitcoin has experienced price fluctuations of 10% in just a matter of days, yet market participants have grown accustomed to lower volatility in recent months. This correction, however, caught many by surprise and led to the largest liquidation since the FTX collapse in November 2022. The key question now is whether this correction holds significance in terms of market structure.
Some experts suggest that decreased liquidity might be responsible for recent volatility. This notion is supported by data that indicates a decline of 2% in Bitcoin’s order book depth, mirroring the decrease in volatility. Market makers could have adjusted their algorithms to accommodate the prevailing conditions.
To better understand the implications of the drop to $26,000, analysts are turning to the derivatives market. By comparing current events to similar instances in the recent past, insights can be gained.
One such instance occurred from March 8 to March 10, causing Bitcoin’s price to plummet by 11.4% to $19,600. Another significant drop followed between April 19 and April 21, resulting in a 10.4% decrease in price. Comparing the behavior of Bitcoin’s futures premium during these events offers insights into market sentiment.
Bitcoin’s quarterly futures typically trade at a slight premium compared to spot markets, reflecting sellers’ willingness to delay settlement for compensation. Healthy markets usually maintain an annualized premium of 5 to 10%. This situation, known as “contango,” is common in various markets, including cryptocurrencies.
The crashes on March 8 and April 19 both showed distinct futures premium behaviors. March 8 saw the premium shift from 3.5% to -3.5%, indicating a bearish sentiment, while April 19’s premium remained steady at 3.5%, suggesting confidence in the market structure or preparedness for the correction.
The recent 11.4% crash between August 15 and August 18 exhibited different behavior. The futures premium started higher, surpassing the 5% neutral threshold. Surprisingly, the premium swiftly returned to a 6% neutral-to-bullish position after the crash, suggesting that professional traders remained optimistic about Bitcoin despite the drop.
Analyzing options markets further reveals that pro traders haven’t adopted a bearish stance. Despite the correction, both options and futures metrics show no signs of professional traders becoming risk-averse. While this doesn’t guarantee an immediate return to the $29,000 support level, it suggests that an extended price correction is less likely.
In conclusion, the recent Bitcoin price drop has spurred analysis from pro traders. Despite the volatility, the derivatives market data indicates that professional traders remain optimistic about Bitcoin’s future trajectory.