The premium of Bitcoin (BTC) futures has reached its highest level in 18 months, raising questions among traders about whether this indicates excessive excitement or a return to the mean following a prolonged bear market.
Bitcoin’s price has been trading within a narrow range of 4.4% since June 22, fluctuating between $29,900 and $31,160 based on daily closing prices. This lack of a clear trend reflects opposing drivers at play. The historic reversion of the U.S. Treasury yield curve, which reached its highest level on record, negatively affected investor sentiment. The inverted spread between the 2-year and 10-year Treasury notes, known as yield curve inversion, often precedes economic recessions.
On the other hand, signs of strength in the U.S. economy have led investors to anticipate further interest rate increases by the central bank to control inflation. Additionally, recent cryptocurrency regulations have garnered attention, such as Kraken exchange being required to disclose details of high-value transactions and Thailand’s ban on crypto lending services.
Amidst these macroeconomic distortions and regulatory concerns, investors are wondering if Bitcoin has the strength to break above the $31,000 resistance. Bitcoin futures’ contract premiums provide clues for traders about the market’s next move. Typically, fixed-month contracts trade at a slight premium to spot markets, reflecting sellers demanding more money to delay settlement. Healthy markets generally exhibit a 5% to 10% annualized premium known as contango.
The demand for leveraged BTC longs has significantly increased, resulting in a jump in the futures contract premium from 3.2% to 6.4% over the past week. This 18-month high marks a shift to a neutral-to-bullish sentiment. Furthermore, analyzing the options markets reveals that the 25% delta skew, which measures price stagnation’s impact on investor optimism, has turned negative, indicating bullish momentum.
Although current metrics suggest moderate bullishness, they may be considered conservative in light of analysts estimating a 50% chance for BlackRock’s spot Bitcoin approval. However, maintaining a certain level of skepticism is healthy for buyers using derivatives contracts, as it avoids the risk of cascading liquidations.
Despite reaching an 18-month high, the current Bitcoin futures’ premium remains relatively modest compared to previous instances of excessive optimism. Today’s 6.3% premium represents a healthy market, while premiums of 10% or higher would indicate excessive optimism or euphoria. Traders can remain confident as bulls still have room to leverage long positions without taking excessive risks.
Note: This article does not provide investment advice; readers should conduct their own research and make informed decisions regarding investments and trading.