Originally published on: August 05, 2024
Bitcoin took a heavy hit on August 5th as the price tumbled 19% to reach $49,320, the lowest level in nearly six months. This drastic sell-off not only affected Bitcoin’s price but also caused the Bitcoin futures premium to drop to its lowest point in three months, indicating a lack of optimism among derivatives traders. Now, the big question on everyone’s mind is whether the current Bitcoin prices below $53,000 present a prime buying opportunity or if there’s a looming risk of another drop below $47,000.
To understand the aftermath of this significant price crash, we need to look closely at the Bitcoin futures markets. Unlike perpetual contracts that settle every eight hours, BTC monthly futures carry additional costs due to their longer settlement periods. Typically, sellers ask for a 5% to 10% annualized premium compared to regular Bitcoin spot markets to offset this issue. In essence, premiums below 5% suggest a sense of pessimism among traders.
On August 5th, the annualized Bitcoin futures premium, known as the basis rate, plummeted to 5.5%, its lowest level in three months. This sharp decline contrasts with the previous week when the indicator peaked at 12%. What’s more alarming is that when the futures premium dropped to 5% on May 2nd, it followed a 15% weekly decrease in Bitcoin’s price from $66,600 to $56,200. However, the current scenario differs significantly given the magnitude of the recent crash and its correlation with traditional financial markets.
During the same period, there were substantial movements in traditional markets, such as the abrupt drop in the 5-year United States Treasury yield from 4.08% on July 29th to 3.45% on August 5th, an uncommon event. This shift led traders to seek refuge in safe-haven assets like government bonds and cash positions, resulting in even gold experiencing a sharp correction.
The fear and uncertainty were also reflected in the BTC options markets, with the put-to-call volume ratio indicating widespread anxiety. The ratio reached 0.95 on August 2nd and August 5th, signaling a high demand for hedging through put options. This contrasts with the previous week’s average ratio of 0.50, which favored call options volume by 100%.
Moreover, over $353 million in leveraged Bitcoin futures longs were liquidated in just two days, the highest amount in almost four months. This evidence suggests that traders were caught off guard by the sudden price drop, emphasizing the impact of derivatives markets on the overall sell-off.
Whether the Bitcoin price crash was triggered by deteriorating conditions in traditional markets or excess leverage in the crypto space is secondary. What matters now is that trader sentiment is at an all-time low, and it will take time for confidence to be restored in the market. As long as the premium on Bitcoin futures remains low and the demand for call options is subdued, a sustainable price recovery above $57,000 seems unlikely in the near term.
As we await further market developments, it is crucial to stay informed and cautious when making investment decisions. While the road to recovery may be challenging, analyzing market trends and sentiments can offer valuable insights for navigating the volatile world of cryptocurrencies.