Although Federal Reserve Chairman Jerome Powell told investors not to wait for rate cuts in 2023, he clearly stated during his press conference that employment data is the main focus right now.
Results of the ADP Payroll Survey on February 1 revealed that hiring in the US private sector was significantly slower in January. The ADP measure for private sector jobs was 106,000, well below the market consensus of 160,000. This data fueled investor expectations of future interest rate hikes by the Federal Reserve in the future.
After testing the $22,500 support on February 1, Bitcoin gained 6.5% in five hours and has since been flirting with the $24,000 level. While the recent gains are exciting, traders should note that the improvement in cryptocurrency market sentiment follows the risk-off attitude seen in traditional markets.
Stocks with negative operating margin posted big gains on Feb. 2, including Coinbase (COIN) 20%, Cloudflare (NET) 15%, Unity Software (U) 12% and DoorDash (DASH) 10%. This factor alone should be a warning sign that the gains made in the past few weeks may not be sustainable. It is also important to remember that Bitcoin’s 40-day correlation with the S&P 500 is still above 75%.
Potential regulatory headwinds could also play a vital role in supporting Bitcoin’s bullish trend. Huang Yiping, a former member of the Monetary Policy Committee of the People’s Bank of China, recently argued that a permanent ban on cryptocurrencies could lead to many missed opportunities.
Huang, a professor of economics at the National School of Development at Peking University, has criticized bitcoin for its lack of intrinsic value, but notes that crypto-related technologies are “of great value” to regulated financial systems.
Let’s take a look at derivatives metrics to understand whether professional traders have added leveraged positions after the recent Bitcoin price breakout.
Bitcoin margin traders are preparing for the $22,500 support
Margin markets provide insight into how professional traders position as they allow investors to borrow cryptocurrencies to leverage their positions.
For example, one can increase exposure by borrowing stablecoins to buy bitcoin. Bitcoin borrowers, on the other hand, can only short the cryptocurrency because they are betting that its price will fall. Unlike futures contracts, the balance between long and margin positions is not always identical.
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OKX/BTC stable margin lending ratio. Source: OKX
The above graph shows that OKX traders’ margin lending ratio increased significantly on January 30, indicating that professional traders added leverage long after Bitcoin successfully rebounded after testing the $22,500 support.
More importantly, January 29th marked an over eleven-week low for the index at 13, favoring stablecoin borrowing by a wide margin – indicating that short positions are not confident of building bearish leverage positions. On the 24th at time of writing, it is clear that the bulls are becoming more comfortable with the current support at $22,500.
Related: Community mocks Charlie Munger for his obsession with banning bitcoins in China
Options traders overlook an optimistic bias
Traders should also analyze the options markets to understand whether the recent rally has caused investors to be risk averse. 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 scale 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
The delta skew of 25% has been relatively quiet near negative 5, indicating similar prospects for the downside and upside of options traders. On the bright side, a retest of $22,500 on January 31 was not enough to break the bulls’ morale. Combined with the lack of demand from margin traders willing to short Bitcoin, the derivatives markets are painting a bullish picture.
Even if it takes a little longer (maybe a couple of days) to break above $24,000, there are no signs of stress from the bitcoin margins and options markets. However, traditional markets still play a vital role in determining direction, so bitcoin investors should not be overconfident.