Bitcoin Derivative Traders Eyeing $40,000 after Binance Settlement

Bitcoin Remains Unshaken

Amidst the recent turmoil in the cryptocurrency market, there are suggestions of potential manipulation of Bitcoin’s price to mitigate contagion risks. These risks involve the issuance of unbacked stablecoins, particularly those linked to exchanges facing regulatory pressures. To gauge investor risk aversion accurately, analyzing Bitcoin derivatives over focusing solely on current price levels is advisable.

On November 14, the US government filed indictments against Binance and its co-founder Changpeng “CZ” Zhao with details unsealed on November 21. Following the admission of offenses, CZ stepped away from Binance’s management as part of a deal that included penalties exceeding $4 billion, including personal fines for CZ. Surprisingly, this news led to a relatively modest impact, with $50 million in BTC leveraged long futures contracts triggered as Bitcoin briefly dipped to $35,600.

On November 20, the United States Securities and Exchange Commission (SEC) took legal action against the crypto exchange Kraken. It accused Kraken of commingling customer funds and failing to register as a securities broker, dealer, and clearing agency. Kraken, in response, claimed that the SEC’s commingling accusations pertained to previously earned fees, essentially representing their proprietary assets.

Another significant development emerged from Mt. Gox, a defunct Bitcoin exchange that suffered a massive hack in 2014, resulting in the loss of 850,000 BTC. On November 21, the Mt. Gox trustee, Nobuaki Kobayashi, announced the redemption of $47 million in trust assets, hinting at plans to initiate the first cash repayments to creditors in 2023. Although details about the sale of Bitcoin assets were not disclosed, investors speculated that the final milestone is approaching.

While recent regulatory actions did not yield concrete outcomes for the spot Bitcoin ETF, amendments to multiple proposals suggest a constructive dialogue with the SEC.

A Look at the Bitcoin Derivatives Market

To validate whether Bitcoin’s price resilience corresponds with the risk assessment of professional investors, one should scrutinize BTC futures and options metrics.

Bitcoin monthly futures contracts often exhibit price variations compared to regular spot exchanges, reflecting participants’ demand for more money to delay settlement. In a neutral market, this difference should hover around an annualized 5% rate.

Currently, Bitcoin futures maintain an 8% premium, indicating heightened demand for leverage longs, though not excessively so. While this level is lower than the 11.5% observed in mid-November, it remains positive given the recent regulatory developments.

To ascertain whether Bitcoin derivatives underwent a substantial influx of hedge operations, an analysis of BTC option markets is essential. The 25% delta skew serves as a key indicator, with arbitrage desks and market makers either overcharging for upside or downside protection. A rise above 7% in the delta 25% skew suggests anticipation of a Bitcoin price drop, while periods of excitement typically see it dip below negative 7%.

Photo: Laevitas: As illustrated above, the options 25% delta skew signals optimism over the past four weeks, with put (sell) options trading at a discount compared to similar call (buy) options. Notably, the recent news flow hasn’t dampened professional traders’ enthusiasm for hedging strategies.

In summary, the market remains in a positive mood despite regulatory actions and potential sell pressure from Mt. Gox, as indicated by derivatives indicators. The liquidation of $70 million leveraged BTC longs has alleviated pressure from potential future negative price swings. Even if the price revisits $35,000, there’s no sign of excessive optimism. Well, this hints at a greater possibility for the BTC price to rally further to $40,000.