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Bitcoin Derivatives: A Glimpse into Investor Sentiment and Market Trends

2024-11-14

Bitcoin derivatives have been presenting intriguing signs of cautious optimism among investors regarding potential gains in the forthcoming year. The market currently finds itself in a state of contango, with futures prices remaining at elevated levels. According to MarketWatch data, December contracts on CME traded at $91,355 on Wednesday, while longer-dated front-month contracts like June 2025 reached $95,670, in contrast to a spot price of $90,570. This indicates a certain pricing dynamic at play.

ARK Invest's Insights on Bitcoin Futures Market

ARK Invest stated in a report this week that Bitcoin's futures market, which has often signaled speculative pressure during contango periods, seems less overbought compared to previous highs this year. When Bitcoin is in contango, the futures price trades above the current spot price. This implies that investors are willing to pay a premium to acquire Bitcoin in the future, a situation typically driven by positive market sentiment and expectations of higher prices. In early 2024, when Bitcoin neared $71,000, futures traded at a 30% premium over spot on offshore exchanges, which ARK described as "speculative." However, by October, the contango on those platforms had decreased to around 11%, suggesting a reduction in speculative excess even in the face of the recent price rally. "Compared to earlier in 2024, the market appears less overbought now," ARK emphasized, highlighting a more stable pricing structure.

Since Donald Trump's US presidential election victory, Bitcoin has witnessed an unprecedented rally. However, recent data indicates that this record-breaking surge is beginning to show signs of moderation in the derivatives market. K33 Research has pointed out that the premium paid for CME-listed Bitcoin futures contracts over the spot market price, a commonly used instrument by US-based institutional investors, has declined. Crypto data tracker Amberdata shows that the open interest for put options with a strike price of $80,000 has surged in the past 24 hours. Vetle Lunde, the head of research at K33 Research, stated that markets seem to be cooling down as the CME basis has trended lower since yesterday's close, hovering around 10% throughout the day, down from the 13-16% basis regime since the election. This might suggest a moderating of risk profiles.Bitcoin is currently trading at around $89,500 in New York, down from its all-time high of $93,462 reached on Wednesday. Since Trump, who is now a supporter of Bitcoin, defeated Vice President Kamala Harris last week, the original cryptocurrency has jumped more than 30%. The liquidation of leveraged bullish bets across the crypto market has contributed to the retreat from the record high. Coinglass data shows that liquidations of long positions were twice as high as for bearish bets in the past 24 hours, at $447 million and $207 million respectively. Earlier in the rally, the liquidations were more evenly split.Possible profit taking after the manic run could be another factor driving the current downturn. As $90,000 is the price level with one of the largest open interest positions in call options, on-chain futures and options trading platform Crypto Valley Exchange CEO James Davies believes that this could lead to profit taking. He said, "Crazy speculative days in the market, big profit taking in the last few hours. $90k is a massive level in the call options open interest."Traders attribute the rally largely to fresh demand from the spot market, as seen in heavy flows into exchange-traded funds backed by the digital asset and relatively moderate leverage. The funding rate for Bitcoin perpetual futures traded on offshore exchanges increased after declining earlier this week. Options traders are showing more interest in calls with strike prices of $110,000 and $120,000, according to data from the largest options exchange Deribit.Davies further stated, "It’s all pure speculative trading right now, expect lots volatility and a lack of clear signals for a while whilst we wait for policy announcements in the US. As we get closer to the November options expiry, it will be interesting to see if $90k becomes a resistance level, or if we are well past it."

Bitcoin's Rally Faces Slowing in Derivatives Market

Bitcoin's Post-Election Surge and Its Impact

After Donald Trump's victory in the US presidential election, Bitcoin experienced a remarkable rally. It jumped more than 30% as Trump became a supporter. This surge was driven by various factors such as fresh demand from the spot market and relatively moderate leverage. However, as time passed, signs of slowing began to emerge.

The CME-listed Bitcoin futures contracts premium over the spot market price started to decline. This indicates a change in the market sentiment and a potential cooling off of the rally. Open interest for put options with a strike price of $80,000 surged, suggesting that investors are becoming more cautious and hedging their positions.

The Role of Liquidations in the Retreat

The liquidation of leveraged bullish bets across the crypto market played a significant role in the retreat from the record high. In the past 24 hours, liquidations of long positions were twice as high as for bearish bets, reaching $447 million and $207 million respectively. This shows that the market is becoming more balanced and that excessive speculation is being corrected.

Earlier in the rally, the liquidations were more evenly split, but now there is a clear shift towards the liquidation of long positions. This indicates that investors are taking profits and reducing their exposure to Bitcoin.

Profit Taking and Future Outlook

Possible profit taking after the manic run is another impetus for the current downturn. As $90,000 is the price level with one of the largest open interest positions in call options, traders are closely watching this level. If Bitcoin fails to break above $90,000, it could face resistance and lead to further selling.

Options traders are aiming higher with more interest in the calls with strike prices of $110,000 and $120,000. This shows that they are still optimistic about the long-term prospects of Bitcoin but are cautious in the short term. As we approach the November options expiry, it will be interesting to see how the market behaves and if $90k becomes a resistance level.

Investors find themselves in a state of contemplation as the postelection rally shows signs of wavering. S&P 500 futures are near flat on Thursday night, with futures tied to the Dow Jones Industrial Average losing 25 points or 0.1%. S&P 500 futures also slipped 0.1%, and Nasdaq 100 futures shed 0.2%. In extended trading, Applied Materials saw a significant slide of more than 5% after posting weak guidance for revenue in the current quarter. On the other hand, Domino’s Pizza jumped more than 7% following Berkshire Hathaway’s announcement of a new stake in the pizza chain. This comes after a losing day on Wall Street where the postelection upswing began to fizzle. The Dow fell more than 200 points during the session, while the S&P 500 and Nasdaq Composite each slipped about 0.6%. Stocks took a downturn in afternoon trading after Federal Reserve Chairman Jerome Powell stated during an event in Dallas that the central bank wasn’t “in a hurry” to cut interest rates, following the Fed’s cut in borrowing costs last week. The three major indexes are on track to end the week lower, giving up some of the gains seen during last week’s climb on the back of Donald Trump’s victory in the presidential election. The Nasdaq Composite has dropped 0.9% this week, while the S&P 500 and Dow have shed 0.8% and 0.5% respectively. “Investors are catching their breath and evaluating whether the advance has merit,” said Sam Stovall, chief investment strategist at CFRA Research. “We really don’t see anything on the horizon right now to upend stocks, but investors are always looking around to see what could cause the trend to end.”

Investors’ Evaluation and Market Outlook

Investors are currently in a state of cautious evaluation. The postelection rally, which initially showed great promise, is now facing uncertainties. The movements in futures markets, such as the near flatness of S&P 500 futures and the losses in Dow and Nasdaq futures, indicate the market’s indecision. Applied Materials’ slide and Domino’s Pizza’s jump highlight the diverse reactions within the market. The Fed’s stance on interest rates also plays a crucial role in shaping investor sentiment. As the week comes to a close, investors will be closely watching economic data on retail sales, import prices, and industrial production. These data releases will provide valuable insights into the health of the economy and may influence future market directions.

BlackRock’s Perspective on Fed Rate Cuts

BlackRock bond king Rick Rieder believes that the Federal Reserve should cut rates at least one more time in December before evaluating its path. The current federal funds rate is between 4.5% to 4.75%, which Rieder deems restrictive for most potential borrowers and homebuyers. He suggests that reducing the rate by another quarter-percentage point in December would bring it closer to 4%. “Once you get that rate there, then you can sit back and say okay, what do we need to do from this point going forward?” Rieder said on CNBC’s “Closing Bell” on Thursday afternoon. “I still think they would like to get at least a couple of cuts done into next year, but the pace at which that happens and whether they actually need it gets really called into question.”

Stocks in Extended Trading

After the bell, several stocks showed significant movements. Domino’s Pizza shares surged more than 7% after Berkshire Hathaway’s new stake announcement. Applied Materials, the semiconductor equipment manufacturer, slid more than 5% due to a weaker-than-anticipated revenue outlook for the current quarter. Palantir Technologies added nearly 4% after announcing its transfer of stock exchange listing from the New York Stock Exchange to the Nasdaq. These stock movements reflect the diverse activities and trends in the market during extended trading hours.

Market Indicators and Closing Thoughts

Dow and S&P 500 futures were little changed shortly after 6 p.m. ET, both slipping around 0.1%. Nasdaq 100 futures ticked lower by 0.2%. As the trading week comes to an end, the three major indexes are on track to end in the red. The Nasdaq Composite has led the way down with a 0.9% decline this week. The S&P 500 and Dow have shed 0.8% and 0.5% respectively. Investors will continue to monitor market developments and economic data in the coming days to gain a better understanding of the market’s future direction. The current situation calls for careful analysis and a patient approach as the market navigates through these uncertain times.