Someone was planning to profit in the derivatives market when they re-released China’s September 3rd ban?

Bitcoin derivatives markets switched from neutral to bearish after China announced a “crypto ban,” which caused the price to drop to $ 40,600.

China reiterates its hostile stance towards bitcoin and cryptocurrencies.

Go back in time a little. On September 24th, the People’s Bank of China (PBoC) announced a number of new measures to encourage cross-departmental coordination to prevent crypto-related activity. These measures are aimed at “preventing payment channels and using the relevant websites and mobile applications in accordance with the law”.

Most investors may have missed the $ 3 billion bitcoin expiration and $ 1.5 billion monthly options that came less than an hour before news of the crypto ban. According to “Molly,” a former Bitcoin Magazine contributor, the announcement from China was released on September 3rd.

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However, if a company is looking to take advantage of falling price action, the press release prior to the expiration of the options contract on Friday at 3:00 p.m. (UTC) will be more meaningful. For example, a put option of $ 42,000 becomes worthless because Deribit’s expiry price is $ 44,873. The holder of this option has the right to sell Bitcoin for $ 42,000, but it’s worth nothing if it expires above that price.

For the conspiracy theorists out there, the Chicago Mercantile Exchange (CME) bitcoin futures expiration date is the average price between 7:00 p.m. and 10:00 p.m. local time. As a result, a potential open interest (OI) of $ 340 million was closed near $ 42,150. In the futures market, long (buy) and short (sell) orders always match, making it almost impossible to guess which side has more power.

Bitcoin price chart | Source: TradingView

Despite the negative spike in spot prices of $ 4,000, total liquidation for leveraged long futures contracts is less than $ 120 million. This data will be very worrying for the bears as it signals that the bulls are not overconfident and are not using undue leverage.

Professional traders are skeptical but remain neutral

To analyze how bullish or bearish the price is for professional traders, one should keep an eye on the futures premium – also known as the “base rate”.

This indicator measures the difference between a longer-term futures contract and the current spot market. In healthy markets, an annual premium of 5 to 15% is expected, a situation known as “contango”.

This price gap is due to sellers charging more money to keep payments going longer, and a red alert appears when the indicator fades or turns negative, known as “backing up”.

Base rate of the 3-month Bitcoin futures contract | Source: Laevitas.ch

Note that the sharp fall on September 24th, caused by a negative performance of 9%, drove the annual futures premium to a two-month low. The 6% indicator is currently at the lower end of the “neutral” range and is ending a moderate bullish phase that lasted until September 19.

To confirm whether this move is specific to this instrument, one should also analyze the options markets.

Options market confirms traders are entering the “fear” zone

The 25% delta deviation compares similar put and call options. The index becomes positive when “fear” prevails, as the premium for protecting puts is higher than for calls with the same risk.

The opposite happens when the market makers are bullish, which causes the 25% delta deviation indicator to go negative. Results between negative 8% and positive 8% are generally considered neutral.