As BTC struggles to recapture $18K, the risk of a Bitcoin price reversal increases

Bitcoin (BTC) price had a mixed reaction on December 9 after the November US producer price report showed a 7.4% increase over 2021. The data showed wholesale spending continued to rise and inflation may last longer than investors previously believed. Oil prices are also in the focus of investors, with WTI crude hitting a new annual low of $71.10 on December 8.

The U.S. Dollar Index (DXY), a measure of the dollar’s strength against a basket of major foreign currencies, held steady at 104.50, but the index traded at 104.10 on Dec. 4, a five-month low. The ability of the US Federal Reserve to control inflation without causing a significant recession.

Trader gutsareon noted that the choppy action led to the cancellation of leveraged longs and shorts, but was followed by a failed initial bounce below $17,050.

According to the analysis, the stagnation of open interest on futures contracts indicates low confidence of the bears.

Regulatory uncertainty could play a key role in limiting Bitcoin’s upside. On December 8, the United States Securities and Exchange Commission (SEC) issued new guidance that may require publicly traded companies to disclose their exposure to crypto assets.

The SEC’s Division of Corporate Finance said the recent crisis in the cryptocurrency industry has “caused widespread disruption” and that US companies may have disclosure obligations under federal securities laws to disclose whether these developments have affected their business.

Let’s look at the dimensions of derivatives to better understand how professional traders position themselves in current market conditions.

Bitcoin margin has experienced a long period of sharp growth

Margin markets provide information on how professional traders position themselves, as it allows investors to borrow cryptocurrency to leverage their positions.

For example, one can increase the risk by taking stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only use the cryptocurrency for a short period of time because they are betting that the price of the cryptocurrency will fall. Unlike futures contracts, the balance between margin longs and shorts does not always match.

OKX stablecoin/BTC margin loan ratio. Source: OKX

The chart above shows that the margin lending ratio of OKX traders increased from December 4th to the 9th, indicating that professional traders are increasing their long-term leverage even after multiple failed attempts to break the $17,300 resistance.

Currently at 35, the metric favors stablecoin borrowing by a wide margin, indicating that shorts are unsure about building low leveraged positions.

Option traders are risk averse

Traders should analyze the options markets to understand whether Bitcoin will eventually withstand the downward news flow. A 25% delta skew is a telltale sign when arbitrage tables and market makers are overloaded for upside or downside protection.

The indicator compares similar call (buy) and put (sell) options and will turn positive when fear prevails because protective put options have a higher premium than risky call options.

In short, the skew metric will move above 10% if traders fear a fall in Bitcoin prices. On the other hand, generalized excitation reflects a negative 10% skewness.

Bitcoin 60 day options 25% delta curve: Source: Laevitas

As shown above, the 25% delta curve improved from December 4th to 9th, reducing options traders’ risk aversion to unexpected price dumps. However, the delta curve at the current 15% suggests that investors remain fearful as market makers become less involved in offering downside protection.

Related: US regulator seeks feedback on DeFi’s impact on financial crimes — Finance Redefined

On the one hand, the lack of open interest seems encouraging as Bitcoin tested the intraday low on December 9th. Again, excessive use of margin indicates that buyers may be forced to reduce their positions in the event of a surprise negative move.

The longer it takes for Bitcoin to retake $18,000, the riskier it becomes for leveraged margin. Traditional markets continue to play an important role in determining the trend, so a potential retest to $16,000 cannot be ruled out.