Backwardation in Bitcoin futures contracts shows that investors lack confidence

Bitcoin (BTC) could have tested the $ 40,000 support in mid-July, but according to various derivative metrics, investor optimism hasn’t changed much.

This situation means either that the price is not what they are looking for to mark the end of the current bear market or that most traders are still underwater at $ 40,000.

One of the best measures of optimism is the futures market premium, which measures the gap between longer-term contracts and the current spot market level. An annualized premium of 5 to 15% is expected in healthy markets. However, in bearish markets, that indicator fades or turns negative, a situation known as “moving backward” – and an alarming red flag.

Huobi 1 Month Bitcoin Futures Base. Source: Skew

According to the graph above, the one-month futures contract has not been able to hold an annualized premium of more than 5% since June 18. There have even been some spells of backwardation, including the last one on July 5th.

There is of course the possibility that the derivatives markets will decouple from the regular spot markets. Investors may not be willing to take the exchange rate risk as futures contracts require margin deposits.

Could spot and derivatives markets diverge?

In order to understand whether the declining signals observed with derivatives are explicitly linked to these instruments, one should analyze the spot market volume. Typically, bearish markets will experience less trading activity a few weeks after the price crash.

Bitcoin market capitalization (above) and aggregate trading volume in billions (USD). Source: TradingView

As predicted, trading volume peaked in late May, but declined more than half a few weeks later. While this cannot in itself be viewed as a bearish indicator, it expresses a lack of interest in trading at current levels.

This movement can occur when buyers are scared and therefore place scaling bids below market levels or when sellers are exhausted. Unfortunately, there’s no way you can know until there’s a decent amount of volume trading outside of the $ 650 billion market cap range.

Options markets can help confirm bearish sentiment

However, there is another way to gauge the optimism of professional traders. The 25% delta skew compares similar call (buy) and put (sell) options. When fear prevails, the metric becomes positive, as the premium for protective put options is higher than for similar risk call options.

The opposite is true when market makers are bullish, which causes the 25% Delta Skew indicator to shift into negative territory.

Deribit Bitcoin Options 25% Delta Skew. Source:

A delta skew of 25% in the -10% to + 10% range is usually considered neutral. However, the indicator has been above this range since June 30th, indicating fear from arbitrage desks and market markets.

The last time this indicator showed bullish sentiment was on April 14th, the exact day of the all-time high of $ 64,900.

Considering that none of the derivatives indicators showed any signs of uptrend, despite Bitcoin price on the 15th. It remains to be seen what will trigger a change in sentiment, but it will certainly take more than a single 10% rally.

The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement carries risks. You should do your own research when making a decision.

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