On December 11, Bitcoin (BTC) fell to a low of $17,580. Although some analysts predicted a bearish outlook, investors remained relatively calm. At the close of the week, the price of Bitcoin may be the same as at the beginning, but the fundamentals of Bitcoin have become healthier.
BTC/USD 4-hour chart Source: TradingView
Whenever the price of Bitcoin falls sharply, there is usually some blatantly bearish analysis. Although this may affect the investment decisions of retail investors, professional traders see it more clearly. They avoided excessive pessimism caused by FUD and negative price fluctuations.
Over the past week, Bitcoin’s dominance has continued to rise, rising from 63.5% to 64.5%. This trend may be driven by the US insurance company MassMutual’s purchase of $100 million in bitcoin and the issuance of $650 million in bonds by MicroStrategy.
This news seems to give more confidence to investors who are skeptical that Bitcoin may retest $20,000.
Weekly performance of 16 major cryptocurrencies Source: Nomics & CoinMarketCap
Bitcoin has fallen by an average of 2.5% in the past week, and it has outperformed the top 15 altcoins. However, compared with the previous month, the total Bitcoin transaction volume is disappointing. This indicator partially negates the recent low of $17,580 because it shows a lack of investor confidence.
On the other hand, recent data also shows that investors are slightly interested in the current level of $19,100, but this price should be tested this week, when trading volume usually increases.
Institutional investors hoard when Bitcoin prices are consolidating
Grayscale, a cryptocurrency fund management company, continues to actively add BTC to their investment portfolio, and its holdings of BTC are valued at more than $10.7 billion.
Grayscale BTC holdings Source: bybt.com
In the past week, Grayscale increased its holdings of 14,050 BTC, with a total holdings of 561130. Therefore, this is another good week for Grayscale Bitcoin Trust. By analyzing the premium of the fund relative to the effective BTC held per share (currently 0.00095116 BTC), we can also see similar excitement.
Grayscale Bitcoin Trust Premium Source: TradingView and Grayscale
As shown in the figure above, the grayscale bitcoin trust premium has risen from 11% to 22% in the past 7 days. This indicator reached a premium of 8% on December 9, but quickly recovered to 16%. Therefore, when it is above the 3-month average of 12%, the indicator reflects positive momentum.
Perpetual futures funding rate remains stable
Perpetual contracts (also called reverse swaps) have an embedded interest rate, which is usually charged every 8 hours. The funding rate ensures that there is no transaction risk imbalance. Even if the open interest of both buyers and sellers is always the same, the leverage may be different.
When the buyer (long) requires more leverage, the funding rate will turn positive. Therefore, the buyer will be the one who pays this fee. This question is especially applicable during bull markets, because bull markets usually have more long demand.
Maintaining interest rates above 2% every week means extreme optimism. This level is acceptable when the market is rising, but if the Bitcoin price adjusts sideways or shows a downward trend, this level is problematic.
In this case, the buyer’s high leverage increases the possibility of large-scale liquidation in the event of an unexpected price drop.
Bitcoin Perpetual Futures Funding Rate Source: Digital Assets Data
Please note that despite Bitcoin’s weakness on December 11, the weekly funding rate has tried to avoid negative values. This data shows that short (sell) and long (buy) traders use roughly the same leverage.
This indicator can be regarded as neutral because both buyers and sellers have room to increase their bets.
Futures premium has returned to normal
Funding rates may introduce some distortions because it is the tool of choice for retail traders and therefore will be affected by excessive leverage. On the other hand, professional traders tend to take the lead in setting futures contracts with longer maturities.
Traders can judge the degree of bullishness by measuring how much futures are more expensive than conventional spot markets. Compared with conventional spot trading, the trading premium for 3-month delivery futures is usually 1.5% or higher.
Whenever this indicator fades or turns negative, this is a worrying red flag. This situation, also known as spot premium, indicates that the market is turning bearish.
BTC futures premium in March 2021 Source: Digital Assets Data
The above chart shows that the indicator once touched an extremely optimistic 5% on December 1, but later adjusted to 2.5% because Bitcoin failed to break through the $20,000 resistance level.
The indicator recently soared to 4%, showing confidence in the recovery of bitcoin prices and also showing the optimism of professional traders.
Call option to put period ratio
By measuring whether more transactions are conducted through call options or put options, the sentiment of the entire market can be judged. Generally speaking, call options are used for call strategies, and put options are used for put strategies.
The ratio of put options to call options is 0.70, indicating that there are 30% less open put options than calls, so the market is bullish.
In contrast, the 1.20 indicator shows that put options are 20% more than call options and can be considered a market bearish. One thing to note is that this indicator summarizes the entire BTC options market, including delivery options.
BTC put option to call option ratio Source: Cryptorank.io
With the price of Bitcoin approaching $20,000, it is natural for investors to seek downside protection. As a result, the put/call option ratio reached a peak of 0.70 on December 2. Although the ratio has risen, it still shows that there are 30% more calls than puts.
After this period of seeking protection, the indicator has risen to a healthy 0.64. Therefore, such an indicator indicates moderate bullishness.
Bitcoin prices are flat, but investors are still bullish
In general, the above key indicators have remained stable within the expected range, especially considering that the market has recently fallen back to $17,580.
As the price of Bitcoin stays above $19,000 and rebounds from each decline, investors are regaining confidence.
At present, all indicators remain neutral to bullish, which supports the possibility of Bitcoin reaching a record high.
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