Bitcoin has risen among most altcoins for the past two months, but that trend was reversed this week when (BTC) rose 20% and its market cap hit $ 1 trillion on October 6, and altcoins now in the red for the day.
The current positive momentum could become dangerous if Bitcoin traders get too confident and abuse leverage to open long positions. To avoid this, traders need to carefully analyze derivatives markets to eliminate this risk.
Notice above how the altcoin market cap increased 5.8% while bitcoin increased 20.8% over the same period. Sure, there are some exceptions like Shiba Inu (SHIB) by 200%, Fantom (FTM) by 60% and Klaytn (KLAY) by 36%. However, the total market capitalization of altcoins does not match the performance of bitcoin.
Several well-known figures, including billionaire Wall Street investor Bill Miller, recently expressed their optimism about Bitcoin and raised concerns about most of the altcoin projects. Miller explicitly mentioned the involvement of “big banks” and mentioned “massive amounts” of venture capital funds flowing into Bitcoin.
The recent Bitcoin frenzy appears to be driven by the macroeconomic scenario. The U.S. raised its debt ceiling by $ 480 billion to meet its obligations by early December, and inflationary pressures from a lack of stimulus packages and low interest rates fueled the ongoing rally in U.S. goods.
For example, oil hit a seven-year high and wheat futures recently hit a record high that has not been seen since February 2013. Even the S&P Case-Shiller House Price Index rose 23.3% annually.
To understand if Bitcoin traders are overexcited, traders should analyze Bitcoin derivatives indicators such as futures market premium and option deviation.
The base rate measures the difference between a long-term futures contract and the current spot market level. This indicator is also commonly known as the futures premium.
In healthy markets, an annual premium of 5 to 15%, known as contango, is expected. This price difference is caused by the seller asking for more money in order to withhold payments longer.
Bitcoin’s recent 20% rally has caused the indicator to hit the upper bound of this neutral zone, which means that investors are optimistic but not yet too confident. Anytime buyers demand excessive leverage, policy rates can easily break 25%, as seen in mid-May.
In order to exclude external factors specific to the futures instrument, one should also analyze the options markets.
The 25% delta deviation compares call (buy) and put (sell) options similarly. This metric always becomes positive when “fear” prevails, as traders expect a potential downward trend.
The opposite was maintained as options traders rebounded, causing the 25% delta deviation indicator to move into negative territory. Measured values between minus 8% and plus 8% are generally considered to be neutral.
The graph above shows that there hasn’t been a single case in the past six months in which options traders have become overconfident, which would signal “greed” if the delta deviation of 25% falls below minus 8.%. Meanwhile, the indicator hovered near zero for the past week, suggesting an equilibrium risk between bulls and bulls.
These results inevitably indicate a lack of buyer confidence, on the contrary. If bitcoin bulls are overconfident at $ 57,000 as early as $ 57,000, there will be little room for additional leverage, increasing the risk of cascading liquidations should a temporary price correction occur.
The bulls are modestly confident and even a 20 percent price correction is unlikely to change the situation as the futures market rate rate is a reasonable premium after the recent rally.
The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement carries risks. You should do your own research when making a decision.
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