Bitcoin’s weekend rally fizzles under $64K — Pro traders take neutral positions

Bitcoin (BTC) gained 6.2% on Aug. 23, pushing its price to levels unseen in three weeks, and has since maintained the $63,000 support level. Despite this positive price movement, BTC derivatives traders appear to be relatively unmoved, indicating a lingering skepticism regarding the sustainability of this trend. 

Bitcoin to stock market correlation in check

Some market participants attributed the ongoing macroeconomic factors as the primary drivers for the crypto market’s behavior, with investors eagerly awaiting the United States Federal Reserve’s decision on interest rates in September.

Given that the Russell 2000 small-cap stock index is currently trading 2% below its highest-ever closing in July 2024, it’s challenging to argue that traders have become risk-averse. At the same time, gold, a traditional safe-haven asset that generally benefits during periods of uncertainty, is merely 0.6% below its all-time high. 

Moreover, the yield on the US Treasury 2-year note is nearing its lowest level since May 2023, which typically means that buyers are becoming more aggressive, accepting lower returns in the process. In essence, the market is simultaneously seeking protection in assets considered safe while also holding on to expectations of positive impacts from second-quarter corporate earnings. 

This scenario tends to be unfavorable for Bitcoin, primarily because most investors still perceive it as a risk-on asset. However, it would be an oversimplification to label Bitcoin’s correlation with equities as consistently high, given that this relationship has varied over time and rarely exceeds a correlation duration of more than five months.

Escalating geopolitical tensions in the Middle East further contributed to investors’ reduced appetite for risk exposure. Following missile exchanges between Israel and Hezbollah across the Lebanon border, and a significant socio-political dispute in Libya that led to a partial halt in the country’s oil production, as reported by CNBC, investor uncertainty has increased.

Bitcoin derivatives stagnated, but this is not necessarily bearish

To better understand how Bitcoin traders are currently positioned, it is essential to analyze the BTC futures premium. In a neutral market environment, investors typically demand a 5% to 10% annualized premium as compensation for the longer settlement periods associated with monthly contracts. When this premium falls below that range, it is generally considered a bearish signal, while periods of heightened excitement can push the indicator above 20%.

Despite the recent improvements in Bitcoin’s price, the BTC futures premium has stagnated around 6%. This indicates that, while some may interpret the premium as a sign of a healthy price recovery driven by spot market activity, professional traders remain cautious about opening leveraged long positions. Conversely, bullish traders might argue that this indicates there is still significant “dry powder” available if Bitcoin continues to demonstrate strength, which could be seen as a net positive.

To determine whether this cautious sentiment is confined to Bitcoin futures, it is also crucial to assess the BTC options market. Typically, when market makers and whales expect a decline in Bitcoin’s price, the options skew metric will exceed 7%. Conversely, periods of optimism usually see the skew drop below -7%.

At present, the BTC options skew is hovering near 0%, unchanged from the previous week, signaling balanced pricing between call (buy) and put (sell) options. This, much like the futures market, suggests that Bitcoin options traders are not confident that the bull market has resumed. In summary, traders seem uncertain that a rally above $67,000 is imminent.

Even though there appears to be growing confidence in the traditional financial markets that US interest rate cuts are increasingly likely following Federal Reserve Chair Jerome Powell’s speech on Aug. 23, uncertainty still looms regarding corporate earnings. 

Companies including the tech giant Nvidia, Best Buy, and Salesforce are scheduled to report earnings on Aug. 28, while the US Personal Consumption Expenditures (PCE) inflation index, due on Aug. 30, could significantly influence market sentiment in the coming weeks. As a result, it makes sense for investors to adopt a cautious, wait-and-see approach rather than making aggressive bullish bets at this juncture.