Bitcoin Futures Contracts Reflect Backwardation and Negative Sentiment

Divya  |  Jul 7, 2021

Trader optimism around Bitcoin(BTC) remains lacking even as the asset tested the $40,000 support in mid-July. While investors are still looking for a bottom, derivates metrics reveal that market sentiment is negative. Additionally, BTC futures contracts indicate backwardation, which is generally an alarming trend. Therefore, it appears the ongoing bear market could persist longer than expected and the occasional upticks would not help the bellwether cryptocurrency out of its current slump. 

Backwardation Seen in Bitcoin Futures Contracts

To gauge optimism around an asset, the futures market premium is a great indicator that calculates the gap between longer-term contracts and spot market levels. Ideally, annualized premiums are expected to hover in the 5% to 15% range within a healthy market. During a bear market, however, this indicator could fade or even turn negative, a condition referred to as backwardation.

As per data, the one-month futures contract has failed to maintain an annualized premium over the 5% limit since June 18. Moreover, there have been some periods marked by backwardation, with the most recent one occurring on July 5.

But there is a possibility that derivatives markets could break away from regular spot markets. Perhaps investors are not ready to take the exchange risk, given the margin deposits required by futures contracts.

The Prospect of a Decoupling Between Spot Markets and Derivatives

For a better understanding of bearish trends recorded in derivatives, it’s important to analyze the spot market volumes. Generally, a bearish market records lower trading levels for a few weeks after a price crash.

This is especially true for Bitcoin, which saw peak trading volumes in May, which declined by more than half after the price drop. While this does not qualify as a bearish indicator, it suggests reduced interest in trading at the current price levels. This kind of activity might take place when investors are hesitant and place scaling bids lower than the market levels or when sellers have been worn out completely. But there’s no way to reach a conclusion till there’s enough volume trading outside the $650 billion market cap area.

Options Market Analysis Can Confirm Lack in Traders Optimism

There is another way to judge the outstanding optimism among professional traders. The 25% delta skew metric can compare similar buy and sell options. It turns positive when fear dominates investor decisions and negative during a bullish run. The metric is termed neutral when it ranges from -10% to +10%.

The 25% delta skew has been above its neutral range since June 30, underscoring the fear from investors. The indicator was in the negative on April 14 when BTC was trading at an all-time high of $64,900.

As none of the derivatives indicators have signaled a bull market even when BTC reached $40,000 on June 15, it’s probable that investors are holding back on opening long positions for now.

Related News