Is there excessive bullish optimism behind Bitcoin’s decline below $ 60,000?

Bitcoin (BTC) has a long history of forming local highs when market-predicted events occur. The Bitcoin Exchange Traded Fund (ETF), recently launched on October 19, is no different and has seen a monthly surge of 53% to an all-time high of $ 67,000.

Now that the price is about to drop below $ 60,000, investors are trying to figure out whether the 10% correction is healthy short-term profit-taking or the end of the bull cycle. To determine this, traders need to analyze BTC’s past price activity to assess possible similarities.

The graphic above shows the date the New York Times announced that “Bitcoin received a cautious nod from China’s central bank” in November 2013. At the time, Yi Gang, the deputy governor of the Bank People of China (POBC), said the People freely participate in the Bitcoin market. He even mentioned his personal opinion, which suggests a constructive long-term view of cryptocurrencies.

It is also worth remembering that this positive coverage aired on Chinese state television on October 28th, showing the world’s first bitcoin ATM in Vancouver.

Negative events can also be predicted

Negative examples can also be found in Bitcoin’s 12-year price campaign. For example, China’s April 2014 ban marked a five-month low.

On April 10, 2014, Huobi and BTC Trade, China’s two largest exchanges, announced that their trading accounts at several banks in the country would be closed within a week. Rumors have been circulating again since March 2014, the reason being a reference in the Chinese newspaper Caixin.

Recent events include the launch of CBOE Bitcoin futures on December 19, 2017, before hitting an all-time high of $ 20,000 per day. Another event that marked the top spot in the country was Coinbase’s initial public offering on the Nasdaq when Bitcoin price hit $ 64,900. Both events are shown on the following diagram:

Note that all of the above events were predicted in advance, although some events do not have an exact announcement date. For example, the first trading session of an ETF based on Bitcoin futures on October 19 was preceded by a statement by SEC chairman Gary Gensler on August 3 that the regulator was ready to accept BTC ETF applications with CME derivatives.

It is possible that previous investors had positioned themselves before the ProShares Bitcoin Strategy ETF was launched, and a look at the BTC derivatives markets could shed more light on this.

Future premiums are not “excessive”

The futures premium, also known as the underlying rate, measures the price difference between the futures contract price and the regular spot market. Quarterly futures are the favorites of whales and arbitrage. While it may seem complicated to private traders because of their settlement dates and the spread versus the spot market, their biggest advantage is the lack of fluctuating funding rates.

Some analysts have pointed to a “return in local currency” after the key rate hit 17%, a five-month high.

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Under normal circumstances the futures market of any kind (soybeans, S&P 500, WTIL) would be traded at a slightly higher price than the regular spot market. This happens mainly because the investor has to wait for the contract to expire to collect their payment, so there is an opportunity cost embedded and this creates a premium.

Let’s say you are conducting an arbitrage trade with the aim of maximizing the amount you are holding in USD. This trader can buy a stablecoin and get an annual return of 12% with decentralized financing (DeFi) or centralized crypto lending. The 12% premium on the Bitcoin futures market should be viewed as a “neutral” rate for the market maker.

Without the short-term high of 20% on October 21, the key rate will remain below 17% after the 50% rally this month. By comparison, the futures premium had risen to 49% on the eve of Coinbase’s stock launch. Hence, those who describe the current outlook as overly optimistic are somehow wrong.

The liquidation risk is not “imminent” either.

Whenever a buyer is overconfident and accepts a high premium for leverage with futures, a 10-15% drop in price can lead to a cascade of liquidations. However, the mere presence of an annual premium of 40% or more does not necessarily create an impending crash risk, as buyers can add margins to keep their positions open.

As major derivatives indicators show, the 10% decline from the all-time high of $ 67,000 on October 20th was not enough to cause signs of concern among professional traders as the earnings base rate is at a healthy 12%.

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.