December will likely be remembered for Bitcoin (BTC)’s false breakout above $18,000, but other than that brief breakout, its trajectory was entirely bearish. In fact, the downtrend currently offering resistance at $18,850 could push the BTC price below $16,000 by mid-January.
Several reasons could explain the negative action, including the exit of audit firm Mazars Group from the cryptocurrency sector on December 16. The company previously provided proof-of-stake audit services for Binance, KuCoin and Crypto.com.
In addition, one can point to the bankruptcy of Core Scientific, one of the largest cryptocurrency miners in the United States. The publicly listed company filed for Chapter 11 bankruptcy on December 21 due to rising energy costs, increased competition, and falling Bitcoin prices in 2022.
A liquidity crisis at cryptocurrency lender and trading desk Genesis Global and its parent company Digital Currency Group (DCG) has sparked fears among investors. More importantly, DCG manages the $10.5 billion Grayscale Bitcoin Investment Trust. The fund is currently trading at a 47% discount to its net asset value due to investor speculation over its exposure to Genesis Global.
Negative pressure from US Federal Reserve tightening action
Apart from the bearish news flow, the macroeconomic scenario worsened after the US Federal Reserve raised interest rates by 50 basis points on December 14. Analysts, including Jim Bianco, head of institutional research firm Bianco Research, said the monetary authority would continue its tighter policy. Monetary policy in 2023.
Investors fear that Bitcoin may break below the current bearish trend support at $16,100, leading to a sharp correction. A veteran crypto trader, Th3 Cryptologist, has pointed to a potential downside by February 2023 that could lead to a $14,000 drop.
On daily TF, I can see that this pattern is a descending wedge with a potential bottom forming in the 14k area. $btc #bitcoin pic.twitter.com/dpPVZZy5Vk
— TH3 Cryptologist (@TH3Cryptologist) December 29, 2022
Looking at Bitcoin derivatives data can help you understand whether price action and recent news are affecting cryptocurrency investor sentiment.
Demand for Bitcoin buyers to use leverage is yet to be seen
Retail traders typically avoid quarterly futures because of the price difference from spot markets. Meanwhile, professional traders prefer these instruments because they prevent the financing rates from changing in a fixed futures contract.
The annual premium on three-month futures should trade between +4% and +8% in healthy markets to cover costs and associated risks. So when futures trade at a discount relative to conventional spot markets, it indicates lack of confidence from leverage buyers – a bearish indicator.
The chart above shows that derivatives traders remain bearish as the Bitcoin futures premium is negative. More interestingly, even the $18,000 pump on December 14 failed to sway whales and market makers to demand balanced leverage between longs and shorts.
Still, the lack of demand for leveraged buys does not indicate that traders are expecting an immediate negative price action. For this reason, it is necessary to analyze the Bitcoin options markets to rule out the externalities inherent in the futures instrument.
Related: $8k dive or $22k rebound? Bitcoin traders await Q1 BTC price action
Option traders are comfortable with low risks
A 25% delta curve is a sign that market makers and arbitrage tables are overloaded for upside or downside protection.
In bear markets, option investors place higher odds on price declines, causing the skew to rise above 10%. On the other hand, bull markets tend to pull the tilt indicator below -10%, meaning bearish put options are discounted.
The delta curve reached 23% on December 29, indicating that options traders are concerned about downside risks.
With the 30-day delta at 18%, both the options and futures markets are pointing to pro traders fearing a test of the $16,100 support.
Therefore, the reasons investors bear down include continued higher interest rates, a lack of demand from leveraged buyers, and BTC option traders positioning for more downside.
The views, opinions and opinions expressed herein are solely those of the authors and do not reflect or represent the views and opinions of Cointelegraph.