Bitcoin futures premium hits 18-month high — Time to flip bullish?

The Bitcoin futures‘ premium surge is having traders ask whether this is excitement or a return to the average after a multi-month bear market.

The Bitcoin (BTC) futures‘ premium has reached its highest level in 18 months on July 4. But traders are now questioning whether the derivatives metrics indicate „excessive excitement“ or a „return to the mean“ after a prolonged bear market.

BTC price gains capped by regulators, macroeconomics

Bitcoin’s price has been trading in a narrow 4.4% range since June 22, oscillating between $29,900 and $31,160 as measured by its daily closing prices. The lack of a clear trend might be uncomfortable to some, but that is a reflection of the opposing drivers currently in play.

For instance, investor sentiment was negatively affected by the historic reversion of the U.S. Treasury yield curve, which reached its highest level on record.

*U.S. 10-year / 2-year spread. Source: Real Investment Advice*

The closely monitored inverted spread between the 2-year and 10-year Treasury notes has reached its highest level since 1981, standing at 1.09%. The phenomenon known as yield curve inversion, when shorter-dated Treasury notes trade at higher yields than longer-dated notes, typically precedes economic recessions.

On the other hand, signs of strength in the U.S. economy have reportedly driven investors to price in the possibility of further interest rate increases by the central bank to keep inflation under control.

In addition to these macroeconomic distortions, cryptocurrency regulation has also been at the center of investors’ attention as of late. Here are just some recent examples:

Kraken exchange was required by the U.S. District Court for the Northern District of California to provide details of users who engaged in transactions exceeding $20,000 within a calendar year;
Thailand’s Securities and Exchange Commission banned crypto lending services, thus prohibiting crypto platforms from offering any form of return on deposited crypto by customers;
The Monetary Authority of Singapore announced new requirements for crypto service providers to hold customer assets in a statutory trust by year-end.

So investors are probably now asking: Does Bitcoin have the strength to break above the $31,000 resistance? Of course, one must take a potential economic recession and the increasing regulatory clampdown measures around the world into account first.

Luckily, Bitcoin futures‘ contract premiums can provide some clues for traders about the market’s next move for reasons discussed below — as well as the costs of hedging using BTC options.

Bitcoin futures premium reaches 18-month high

Bitcoin quarterly futures are popular among whales and arbitrage desks. However, these fixed-month contracts typically trade at a slight premium to spot markets, indicating that sellers are asking for more money to delay settlement.

As a result, BTC futures contracts in healthy markets should trade at a 5% to 10% annualized premium — a situation known as contango, which is not unique to crypto markets.

*Bitcoin 3-month futures annualized premium. Source: Laevitas*

The demand for leveraged BTC longs has significantly increased over the past week as the futures contract premium jumped to 6.4% on July 3 from 3.2% one week prior. Besides reaching the highest level in 18 months, the metric has finally moved to a neutral-to-bullish area.

To gaugue market sentiment further, it’s also helpful to look at the options markets as the 25% delta skew can assess whether the price stagnation has made investors less optimistic. It reveals when arbitrage desks and market makers charge higher prices for protection against upside or downside movements.

In short, if traders expect a drop in Bitcoin’s price, the skew metric will rise above 7%, while periods of excitement typically have a negative 7% skew.

*Bitcoin 30-day options 25% delta skew. Source: Laevitas*

The 25% delta skew metric experienced a complete turnaround, indicating bullish momentum picked up on June 21 when it dropped below -7%. As Bitcoin’s price climbed back above $30,000, the indicator continued to improve, culminating in „greed“ with a negative 13% skew on July 2.

Moderate optimism „healthy“ for Bitcoin market

Typically, a 6.4% futures basis and a negative 13% delta skew would be considered moderately bullish. However, considering analysts‘ estimating a 50% chance for BlackRock’s spot Bitcoin approval, these metrics might be seen as conservative. But a certain amount of skepticism is indeed healthy for buyers using derivatives contracts and avoids the risk of cascading liquidations.

Currently, macroeconomic factors and regulatory uncertainty likely explain the suppressed optimism for BTC derivatives despite multiple ETF requests from the world’s largest asset managers.

So 18-month highs aside, the current Bitcoin futures‘ premium remains relatively modest, compared to previous instances of excessive optimism such as the 19% in October 2021.

Thus, today’s 6.3% futures premium represents a healthy market as opposed to 10% or higher indicating excessive optimism or euphoria. Moreover, traders should remain confident given that bulls have room to further leverage long positions without running excessive risk.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.