After causing initial chaos in the markets, the company refuted speculation of an “imminent” bankruptcy on November 22, although it confirmed difficulties in raising funds. More importantly, Genesis’s parent company, Digital Currency Group (DCG), owns Grayscale – the asset manager behind the Grayscale Bitcoin Trust, which holds around 633,360 BTC.
Contagion risks from the FTX-Alameda Research implosion continue to put downside pressure on markets, but the industry is improving transparency and bankruptcy risks. For example, on November 24, crypto-derivatives exchange Bybit launched a $100 million fund to help market makers and high-frequency trading institutions in financial or operational difficulty.
Recently, on November 25, Binance published a Merkle Tree-powered proof of funds for its Bitcoin deposits. Moreover, the exchange has defined how users can use the mechanism to verify their holdings. There is no doubt that central institutions must adopt transparency and insurance mechanisms to restore investor confidence.
First, however, one must analyze the Bitcoin derivatives markets to fully understand how professional traders internalize this news.
Discounting in the futures market has improved slightly but is still far from bullish
Fixed month futures contracts usually trade at a slight premium to regular spot markets because sellers require more funds to withhold settlement for a longer period. Technically known as contango, this mode is not limited to crypto assets.
In healthy markets, futures contracts should trade at an annual premium of 4% to 8%, which is enough to offset the risk as well as the cost of capital. Conversely, when the demand for bearish bets is exceptionally high, it causes discounting in the futures markets – known as backwardation.
Bitcoin futures annual premium for two months. Source: Laevitas.ch
Looking at the above data, it becomes clear that derivatives traders flipped lower on November 9, as the bitcoin futures premium turned negative. However, according to futures markets, the $15,500 drop on November 21 was not enough to instill additional demand for leveraged short positions.
Options markets confirm downtrend
Traders should analyze the options markets to understand if Bitcoin is likely to retest the $15,500 support. A delta deviation of 25% is a significant sign when arbitrage desks and market makers overcharge for upside or downside protection.
The indicator compares similar buy (buy) and sell (sell) options and will turn positive when fear spreads because the premium of protective call options is higher than risk call options.
In short, the deviation measure will move above 10% if traders are afraid of a Bitcoin price crash. On the other hand, generalized arousal reflects a negative bias of 10%.
Bitcoin 60-day options 25% delta skew: Source: Laevitas
As shown above, the 25% delta deviation has been above the 10% threshold since November 9, indicating that options traders are seeking higher risk from unexpected price dumps. Currently at 18%, this indicates that investors are scared off and reflects a lack of interest in offering downside protection.
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A sudden pump is likely to cause an even greater impact
Given that both the Bitcoin futures and options markets are currently pricing higher odds to the downside, there is no reason to believe that an eventual retest of the $15,500 low would trigger massive sell-offs.
Moreover, the slight drop in futures discounting shows bears’ lack of confidence to open leveraged short positions at current price levels. Although bitcoin derivatives data remains bearish, a surprise eventual rally to $18,000 is likely to cause more chaos. But, for now, bears are still in control according to BTC options and futures data.