Bitcoin price action decouples from stock markets, but not in a good way

This week, stock markets have started to flash a little green and Bitcoin (BTC) is decoupling from traditional markets but not in a good way. The cryptocurrency is down 3% while the tech-heavy Nasdaq Composite stock index is up 3.1%.

May 27 data from the US Department of Commerce shows the personal savings rate fell to 4.4% in April to the lowest level since 2008 and crypto traders fear worsening Global macroeconomic conditions only heighten investors’ aversion to risky assets.

For example, Invesco QQQ Trust, a US exchange-traded fund based on a $160 billion technology company, is down 23% year-to-date. Meanwhile, the iShares MSCI China ETF, a $6.1 billion tracker of Chinese stocks, is down 20% in 2022.

To get a clearer picture of how crypto traders are positioned, traders should analyze Bitcoin derivatives metrics.

Margin traders are increasingly optimistic

Margin trading allows investors to borrow cryptocurrency and leverage their trading position to potentially increase returns. For example, one can buy cryptocurrencies by borrowing Tether (USDT) to expand exposure.

Borrowers of Bitcoin can only short the cryptocurrency if they bet on its falling price and unlike futures, the balance between longs and margin shorts is not always evened.

USDT/BTC margin lending ratio at OKX exchange. Source: OKX

The chart above shows that traders have been borrowing more USD Tether recently, as the ratio has fallen from 13 on May 25 to 20 currently. The higher the indicator, the more confident professional traders are with Bitcoin price.

It should be noted that the margin lending ratio of 29 reached on May 18 was the highest level in more than six months and reflected bullish sentiment. On the other hand, a USDT/BTC margin lending ratio below 5 is usually a bearish sign.

Options markets have entered an “extreme scare”

To rule out externalities specific to margin markets, traders should also analyze Bitcoin options pricing. The 25% delta skew compares similar call (call) and put (sell) options. The measure will turn positive when fear prevails, as the protection premium of put options is higher than that of similarly risky call options.

The opposite is true when greed prevails, which pushes the delta asymmetry indicator by 25% into the negative zone. In short, if traders fear a Bitcoin price crash, the bias indicator will move above 8%. In contrast, generalized excitement reflects a negative bias of 8%.

Bitcoin options 30 days 25% delta skew at Deribit exchange. Source: Laevitas.ch

The 25% bias indicator has been above 16% since May 11, indicating an extremely imbalanced situation as markets and professional traders are unwilling to take downside risk.

More importantly, the recent 25.6% peak on May 14 was the highest 25% bias ever recorded in Bitcoin history. Currently, there is a strong bearish sentiment in the BTC options markets.

Related: Falling Bitcoin Price Doesn’t Affect El Salvador’s Strategy

Explain the duality between margin and options

A potential explanation for the divergent mindset between BTC margin traders and options pricing could have been the collapse of Terra USD (UST) on May 10. Market makers and arbitrage desks may have suffered heavy losses when the stablecoin lost its peg, reducing their risk appetite. for BTC options.

Additionally, the cost of borrowing USD Tether has dropped to 3% per year on Aave and Compound, according to Loanscan.io. This means that traders will take advantage of this low-cost leverage strategy, thereby increasing the USDT/BTC margin lending ratio.

There is no way to predict what would cause Bitcoin to end the current downtrend, so access to cheap funding does not guarantee positive price action.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

Comments are closed.