Bitcoin (BTC) lost $28,000 support on June 12 due to deteriorating macro conditions. The two-year US Treasury yield closed on June 10 at 3.10%, the highest level since December 2007. This shows that traders are demanding higher rates to hold their debt instruments and expect inflation to remain a constant problem.

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Louis S. Barnes, Cherry Creek Senior Loan Officer, declared that since the United States reported its highest inflation in 40 years, there were no buyers in the mortgage-backed securities (MBS) markets. Barnes added:

Shares are down 2% today [June 10]but it will be a heck of a lot more when you consider what a complete shutdown of housing would mean.”

MicroStrategy and Celsius use elevated alarms

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The bitcoin sell-off is adding pressure to the crypto market, with various media debating whether the current crypto crash will exacerbate Nasdaq-listed U.S. analytics and business intelligence firm MicroStrategy and its $205 million bitcoin-backed loan at Silvergate Bank. The interest-only loan was disbursed on March 29, 2022 and is backed by bitcoins held in a mutually authorized custodian account.

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As Microstrategy CFO Fong Le stated on May 3, if bitcoin drops to $21,000, additional margin will be required. However, on May 10, Michael Saylor clarified that the entire position of 115,109 BTC could be pledged, which would reduce the liquidation amount to $3,562.

Finally, on June 13, betting and lending crypto platform Celsius suspended all withdrawals from the network. Rumors of insolvency quickly arose as the project moved massive amounts of wBTC and Ether (ETH) to avoid liquidation on Aave, a popular betting and lending platform.

Celsius reported that assets under management topped $20 billion in August 2021, ideally more than enough to trigger a doomsday scenario. While it is impossible to determine how this liquidity crunch will play out, the event caught Bitcoin investors at the most inopportune moment.

Bitcoin futures readings close to bearish territory

The premium of the Bitcoin futures market, the main indicator of derivatives, briefly moved into the negative area on June 13. This indicator compares long-term futures contracts and the traditional spot market price.

These fixed calendar contracts typically trade at a small premium, indicating that sellers are demanding more money to hold settlement longer. As a result, three-month futures should trade at 4% to 10% annualized premium in healthy markets, a situation known as contango.

Whenever this indicator disappears or becomes negative (backwardation), it is an alarming red flag as it indicates the presence of bearish sentiment.

Annual premium on 3-month bitcoin futures. Source: Laevitas.ch

Although the futures premium has already been below the 4% threshold for the past nine weeks, it managed to maintain a moderate premium until June 13th. While the current 1% premium may seem optimistic, this is the lowest level since April 30 and marks the edge of the overall bearish sentiment.

An unhealthy derivatives market is an ominous sign

Traders should analyze bitcoin options prices to prove once again that the structure of the crypto market has deteriorated. For example, a delta skew of 25% compares similar call (buy) and put (sell) options. This indicator will become positive when fear prevails because the premium of a defensive put option is higher than that of a call with the same risk.

The opposite occurs when the prevailing mood is greed, which causes the 25% delta skew indicator to move into the negative area.

Deribit 30-day Bitcoin options with a delta skew of 25%. Source: laevitas.ch

Readings between negative 8% and positive 8% are generally considered neutral, but the June 13 peak of 26.6 was the highest ever recorded. This downside risk aversion is unusual even in March 2020, when oil futures fell negative for the first time in history and bitcoin fell below $4,000.

The main message from the Bitcoin derivatives markets is that professional traders are unwilling to add leveraged long positions despite the extremely low cost. In addition, the absurd price gap for putting (sell) option pricing shows that the June 13 crash to $22,600 took seasoned arbitrage bureaus and market markers by surprise.

For those looking to “buy the dip” or “catch the falling knife”, a clear bottom will only be formed once derivatives performance suggests that market structure has improved. This will require BTC futures premium to recover the 4% level and options markets to find a more balanced risk assessment as the 25% delta skew returns to 10% or lower.

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