An indicator linked to bitcoin futures and options volatility has surged twofold this year, indicating significant levels of leverage and speculation in the market.
This bitcoin (BTC) metric suggests a buildup of speculative fervor, often preceding a scenario where leveraged positions are unwound rapidly, leading to a sudden price decline. The ratio between the implied yield basis, which measures the spread between one-month futures prices and spot market prices, and the implied volatility from options has more than doubled to approximately 0.34 this year, according to data from STS Digital, a crypto structuring and trading solutions firm.
Jeff Anderson, a senior trader at STS Digital, explained that when the implied yield basis surpasses underlying volatility levels, it typically indicates heightened levels of leverage and speculation. Excessive bullish speculation tends to result in leveraged positions being forced to close due to margin shortages, known as long liquidations, which can exacerbate price drops.
Bitcoin’s recent rally to $51,500, representing a nearly 22% increase this year, has been largely fueled by robust demand for U.S.-based spot exchange-traded funds (ETFs) introduced last month. However, inflows into these ETFs slowed down last week, with just 500 BTC attracted by 10 ETFs on Wednesday.
Historically, extreme levels of futures basis relative to options-induced volatility, observed in the third and fourth quarters of 2023, have preceded significant daily price fluctuations.
Bitcoin has been trading within a tight range of $50,500 to $53,500 in recent weeks, a period during which market activity typically builds up momentum for a breakout in either direction. Greg Magadini, head of derivatives at Amberdata, noted that Bitcoin is currently in a negative gamma profile range, suggesting options market makers are trading in the direction of the price, potentially reinforcing the prevailing trend.
