Bitcoin price drop to 29K not caused by derivatives

Derivatives had an insignificant role in the Bitcoin price correction

Futures premium showed no sign of backwardation

June 15 rally followed by a steep fall of 30%

No panic from top traders

Bitcoin price fall has shell shocked investors, but market data reveals that derivatives had an insignificant role in the digital currency price correction. On June 15, there was a flurry of activity on the bitcoin network, and the bitcoin price touched $41,000. Bitcoin, which Satoshi Nakamoto created in 2009, achieved all time high value since May 21.

The date was also significant because on that date, one of the biggest institutional investors, MicroStrategy (MSTR), announced a successful $500 million debt offering. It led to a feeling among investors that the bearish phase in digital currency market is finally over. 

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MicroStrategy (MSTR) revealed that the funds would be available in one or two business days, and the money will be used to buy more Bitcoin from the market. The business intelligence company followed this with another surprise filing to sell up to $1 billion of its stock to buy even more Bitcoin.

A steep 30% fall over the next week caused Bitcoin to reach its lowest levels since January 22. Although the fall to $28,800 bottom might have lasted less than fifteen minutes, the writing was on the wall; the bearish phase had already started.

Fall blamed on closed Bitcoin Mining in China

The sell-off was hugely attributed to the shutting of crypto mining by Chinese miners. The miners were forced to stop mining activities by authorities in China.Bitcoin mining is an energy-intensive process, and many crypto mining hubs had sprung up in Northern China lured by cheap labor and power prospects. However, of late environmental concerns had forced China to enforce stricter laws to reduce carbon emissions. Since most of the power came from coal-based power plants, the authorities have started to come down heavily on Bitcoin mining activities.

The People’s Bank of China (PBoC) order to all banks not to provide account opening or registration for virtual currency-related transaction proved the last straw.

The question in everyone’s mind is, did derivatives play a role in the Bitcoin price correction, or was there any hint of stress pointing to an even more dangerous second leg down?

The futures premium did not show any distress signs

The best way to gauge is to see the futures premium, which measures the longer-term futures contracts to the current spot levels. If the showing fades or turns negative, it is a sure sign of distress. The scenario is labeled as backwardation and indicates a bearish sentiment.

Huobi 3-month Bitcoin futures basis. Source: Skew

The optimum range between futures should be 5% to 15% annualized premium in healthy markets. There was only one worst moment on June 22 when the graph touched 2.5%. It is considered bearish but not enough to trigger an alarm to cause a steep fall in bitcoin payments.

No panic from top traders

Another indicator of crisis is the top traders’ long-to-short indicator. The figure is deduced using clients’ consolidated positions, including spot, margin, perpetual and futures contracts. It is a fair indicator of professional traders’ effective net position.

Different crypto exchange methodologies make it difficult to have a uniform conclusion. However, analyzing the changes over a while does give valuable insights. An example to study is Binance which increased their long positions relative to shorts on June 22.

Some increase in their net short exposure can be seen at Huobi, but it is not startling, and the indicator reached the same level two days before.

Finally, OKEx top traders trimmed their longs on June 20 and have maintained a 0.80 level favoring shorts by 20%.

Long futures liquidations were less than $600 million

A person who oblivious of the price swing could never guess that Bitcoin transactions went below $29,000 based on futures liquidations data.

Aggregate futures liquidations (longs in red). Source.

The graph shows that just under $600 million in longs were liquidated on June 22, lower than the previous day’s figures which were $750. If longs were to be overleveraged, a 20% drop in 48 hours would have precipitated stop orders of a much greater size.

The Data does not reveal any sign of stress caused by longs or negative swings caused by the derivatives market to bitcoin transaction.

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Steve Anderrson
Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.

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