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Bitcoin Crashes Below $20.3K As Regulatory Pressure Intensifies, It’s A Bloodbath

source-logo  econintersect.com 09 March 2023 22:14, UTC

Bitcoin (BTC) margin and options markets are currently steady, even as the investors run for cover as crypto and stock prices implode.

The Bitcoin bears are back and they are mauling the bulls mercilessly. BTC traders saw continued downside pressure after the 5.5% drop in BTC price on March 7. Increased odds of more interest rate increases by the Federal Reserve and regulatory pressure in cryptos explain some of the latest movements in the markets.

Financial markets showed some signs of stress as the inverted bond curve reached its highest level since the 1980s. Longer-term dated yields have stalled at 4%, while two-year treasury notes traded above 5% yield in March.

Since July 2022, longer-dated treasury yields have failed to keep pace with the surging two-year benchmark, resulting in the inverted curve distortion that normally precedes economic downturns. According to reports by Bloomberg, the indicator reached an entire percentage point on March 7, the highest level since 1981, when Fed Chair Paul Volcker faced double-digit inflation.

This week, BlackRock, the world’s biggest asset manager, increased its forecast for U.S. Federal funds to 6%. The chief investment officer of global fixed income at BlackRock, Rick Riede, believes that the Fed will keep interest rates significantly high for “an extended period to slow the economy and get inflation down to near 2%.”

Fear Of Crypto Regulation Grows

Based on a Wall Street Journal report, the Biden administration wants to execute the wash sale rule to cryptocurrency, which would put an end to a strategy where a trader sells and then instantly buys digital assets for tax purposes.

Additionally, the Public Company Accounting Oversight Board (PCAOB), an organization that keeps an eye on the audits of public firms in the United States, recently put out a stern warning to the investors about proof-of-reserves reports that auditing companies send out.

The organization, backed by the United States Securities and Exchange Commission (SEC), said that:

“Investors should note that PoR engagements are not audits and, consequently, the related reports do not provide any meaningful assurance.”

Here is a look at derivatives metrics to majorly understand how professional traders are positioned in the current market conditions.

Bitcoin Margin Markets Have Normalized

Margin markets offer insight into how professional traders are positioned since they enabled investors to borrow crypto to leverage their positions. For instance, one can increase exposure by borrowing stablecoins and buying Bitcoin. Borrowers of Bitcoin, on the flip side, can just take short bets against the crypto.

OKX stablecoin/BTC margin lending ratio. Source: OKX

The market chart indicates that OKX traders’ margin lending ratio plunged dramatically on March 9, moving away from a situation that previously favored leveraged long positions. Given the general bullishness of cryptocurrency traders, the current margin lending ratio at 16 is relatively neutral.

On the flip side, a margin lending ratio above 40 is quite rare, although it has been the norm since February 22. It is somewhat driven by a high borrowing cost for stablecoins of 25% per year. Looking at the recent anomaly, the margin market has returned to a neutral-to-bullish state.

Options Traders Are Considering A Low Risk Of Extreme Price Corrections

Traders must analyze options markets to comprehend whether the recent correction has made investors become increasingly risk-averse. The 25% delta skew is a major sign whenever arbitrage desks and market makers overcharge for upside and downside protection.

This indicator compares similar call (buy) and put (sell) options and will turn positive when fear becomes prevalent since the premium for protective put options is higher than the premium for the risk call options.

In general, in case the traders expect a Bitcoin price drop, the skew metric will surge above 10% and general excitement have a negative 10% skew.

Bitcoin 60-day options 25% delta skew: Source: Laevitas

Although Bitcoin failed to break the $25,000 resistance on February 21 and then experienced a 14% correction in 16 days, the 25% delta skew remained steadily in the neutral zone for the last month. The current positive 3% skew indicates a balanced demand for the bullish and bearish option instruments.

Derivatives data indicates that professional traders are unwilling to go bearish, as evidenced by options traders’ neutral risk assessment. Moreover, the margin lending ratio shows that the market is improving as some demand for the bearish bets has come up, but the structure currently remains neutral-to-bullish.

Considering the massive downside price pressure from a macroeconomic standpoint, and continuing regulatory pressure in the United States, the bulls maybe should be content that Bitcoin derivatives have remained strong.