Bitcoin is under immense pressure from regulators and in a sign of the times, Binance has been forced to temporarily suspend its operations by the United Kingdom. But it’s unclear if the regulatory environment is the reason for Bitcoin’s sluggish prices that keep trending in the lower end of the $30,000-$35,000 range. Apart from a price weakness, Bitcoin has also started to see some unusual activity in its futures contracts, which could be a signal of impending troubles for the currency.
Bitcoin Futures Show Inverted Pattern as Investor Confidence Plummets
Whales and arbitrage desks usually prefer Bitcoin’s quarterly futures, which could seem confusing to retail investors due to their price difference from spot exchange markets and settlement dates.
Traders opting for perpetual contracts are required to pay a fee every 8-hours that changes according to the leverage demanded. As opposed to this, fixed-rate expiry contracts usually trade at a premium from normal spot exchange markets. This happens because sellers postpone settlements and ask for higher compensation for this duration.
As per data from Bitcoin Futures Info, the September 24 futures contract is trading at a 2.2% annualized premium, while the December 31 contract is at a 3.8% premium. This curve in Bitcoin futures annualized premiums is expected because sellers are likely to ask for higher premiums over longer settlement periods.
It is also noteworthy that arbitrage desks are engaging in a decent amount of cash and carry trades as they purchase Bitcoin and short futures contracts in tandem. These investors aren’t hedging their bets on a price downturn since their net exposure is flat, but this kind of trading limits the premium on futures contracts.
Inverted Curves Are Not Always Associated With Bearish Trends
It’s not always necessary for the market to experience bearish activity in response to a flat or a slightly inverted futures curve on the exchanges. For more clarity, investors should refer to the three-month futures premiums, which should always hover above 4%. When these premiums fall below the 4% annualized rate, it is a sign of reduced interest in leverage longs and signals bearish activity.
At present, the September annualized premium of four notable exchanges is standing at 3.3%, which is definitely a cause for concern. Although, it’s not out of the ordinary for markets to experience something like this after a drastic price correction. Therefore, this can simply be summarised as a slump in investor confidence instead of a worrisome situation.