Bitcoin Futures Premium hits 5 month high, but is this the main reason the price fell below $ 60,000?

Bitcoin has historically made local highs when events are predicted by the market before they occur. The Bitcoin Exchange Traded Fund (ETF) launched on October 19 was no different, rising 53% monthly to an all-time high (ATH) of $ 67,000.

Now that the price has fallen around $ 61,000, investors are trying to figure out whether that 10% correction was due to short-term profit-taking or the end of the bull cycle. To determine this, one needs to analyze Bitcoin’s past price activity to see if Bitcoin has any similarities.

Bitcoin price chart | Source: TradingView

The dashed line in the graphic above is the date the New York Times published an article in November 2013 entitled “Bitcoin Gets a Cautious Nod from China’s Central Bank”. Back then, Yi Gang, deputy governor of the People’s Bank of China (POBC), said that people can freely participate in the bitcoin market. He even mentioned his personal views by suggesting a constructive long-term view of digital currencies.

It’s also worth noting that this good news aired on Chinese state television on October 28th, and it was also the day the world’s first bitcoin ATM was installed in Vancouver.

Negative events can also be predicted

Negative examples can also be found during Bitcoin’s 12-year price journey. For example, China’s April 2014 ban marked its 5-month low.

Bitcoin price chart | Source: TradingView

On April 10, 2014, Huobi and BTC Trade, China’s two largest exchanges, announced that their trading accounts at several banks in the country would be closed within a week. Rumors have been circulating again since March 2014, the reason being a reference in the Chinese newspaper Caixin.

Recent events include the launch of Bitcoin futures on the Chicago Board Options Exchange (CBOE) on December 19, 2017, before it hit an ATH of $ 20,000 per day. Another event that marked the boom in the crypto space was the successful IPO of the Coinbase exchange on the Nasdaq when the Bitcoin price hit $ 64,900. Both events are shown on the following diagram:

Bitcoin price chart | Source: TradingView

Note that all of the above events were largely expected, although some do not have an exact announcement date. For example, the first trading session of an ETF based on Bitcoin futures on October 19 was preceded by a statement by SEC Chairman Gary Gensler on August 3 that the regulator was ready to accept Bitcoin ETF applications with CME derivatives.

It’s possible that previous investors positioned themselves before ProShares’ Bitcoin Strategy ETF was launched, and a look at the derivatives markets could provide more insight.

Futures Contract Premiums Are Not “Exaggerated”

The futures contract premium, also known as (the base rate), measures the price difference between the futures contract price and the regular spot market. Quarterly futures are the favorites of whales and arbitrage. Even if it may seem complicated for private investors due to their settlement dates and the price range compared to the spot market, their biggest advantage is the lack of fluctuating financing rates.

Some analysts have pointed to a “return in local currency” after the key rate hit 17%, a five-month high.

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– Dylan LeClair (@DylanLeClair_) October 20, 2021

In a healthy market, futures markets of all kinds (soybeans, S&P 500, WTIL) are traded at a slightly higher price than the regular spot market. This happens mainly because the investor has to wait for the contract to expire to receive their payout, which creates an opportunity cost and this creates a premium.

Annual premium for 3-month Bitcoin futures | Source: Laevitas.ch

Let’s say you are making an arbitrage trade with the aim of maximizing the amount of dollars you are holding. This trader can buy a stablecoin and get an annual return of 12% with a DeFi service or centralized crypto lending. The 12% premium on the Bitcoin futures market is to be viewed as neutral for the market maker.

Without the short-term high of 20% on October 21, the base rate will remain below 17% after rising 50% since the beginning of the month. By comparison, futures premiums rose 49% on the eve of Coinbase’s stock launch. Hence, those who rate the current outlook as overly optimistic are somehow wrong.