The price of bitcoin had been fluctuating for a while before the price surge in October. The price of altcoin had been increasing rapidly, with some coins doing as much as 2000% in price within 6 months.
But this trend of increasing altcoins and slow price increase in bitcoin changed when the price of bitcoin reached a new all-time high, increasing the market capitalization of the foremost cryptocurrency.
Bitcoin rallied back to ‘prominence’ with a 20% increase in current bitcoin price in October, increasing its market capitalization to $1 trillion. This pushback showed, again, that bitcoin was regaining its stand as the ‘big brother’ of the cryptocurrency space.
While other altcoins also increased in price, the overall growth in price of altcoin didn’t match bitcoin’s price increase and market capitalization. And this has shifted investors’ attention back to bitcoin.
There seems to be more confidence among investors, and this overconfidence, many analysts have warned, can be dangerous for cryptocurrency. An overconfident market might cause traders to abuse and leverage long positions.
However, these fears might not be true after all.
Maybe traders have learned from their previous burned experiences with bitcoin and crypto futures in the past. Or maybe not.
To fully grasp the level of fear or overconfidence of traders, let us look at the derivatives market and see how traders reacted in the past, and how they are reacting now.
Increase in Bitcoin’s Market Capitalization
The price increase of bitcoin has caused its market capitalization to increase by 20.8% while altcoins increased by just 5.8%.
The bitcoin cost increase has raised hopes again amongst analysts, bitcoin traders, and investors as well as Billionaires. Wall Street, a billionaire investor, expressed confidence in bitcoin’s future, citing the influx of big banks and venture capitalists into the cryptocurrency space.
Their influx of money is getting more investors who were once skeptical about bitcoin interested. The confidence in bitcoin’s sustainability and long-term utility is the main reason for the increase in huge banks’ approval.
However, the number of altcoins and their accompanying projects have raised alarm bells. Still, bitcoin’s success has papered over whatever concerns naysayers may have about cryptocurrency.
What Caused the Price Surge?
Market sentiments always influence how much traders are willing to buy an asset. Bitcoin’s price is not any different. But more than just sentiments, there are fundamental issues, macroeconomic factors, that underlie current bitcoin’s price increase.
The United States increased its debt limit by $480 million, the almost very low interest rates have caused a lot of reactions to make more money available in the economy. As more households get access to more money, more spending is only paramount.
In addition to these factors, the general world economy, given some factors, is experiencing good times.
The price of oil reached its highest in 7 years, and wheat futures also recorded their highest price since February 2013. It has been a season of new highs.
Are Bitcoin Traders Overconfident?
The price surge is indicative of a growing market, and traders won’t be out of place if they are excited. But to fully grasp what the mood in the market is, and what to expect in the future, let us look at the bitcoin and crypto futures market and options skews.
These charts will serve as near-perfect indicators to explain the emotional swing among bitcoin traders.
The Futures Premium Shows Traders Are Slightly Bullish?
Looking at the stats from exchange platforms such as Redot.com, we can feel the general pulse of bitcoin traders. They are bullish but cautious. And it is understandable.
Let’s look at the futures premium to give us a deeper understanding. How futures traders are evaluating the market is a sign of where the price might be headed towards; the classic law of demand and supply coming to play.
Futures premium measures the bitcoin futures price and the spot price, calculating the difference between the futures price of bitcoin and the spot price.
The futures price gives you an idea of how traders are valuing an asset and their sentiment towards the asset’s price. Do they feel that the price of the asset will increase or decrease, and how much change are they betting on?
If the difference between the bitcoin futures price and the spot price is high, especially on top exchange platforms, then the market is operating at extremes: fear or overexcitement.
The future premium shows that Catango, a situation where the futures price of an asset is higher than the spot price, the current bitcoin price, is around 5%, meaning traders are not overly confident.
A 5% to 15% annualized futures premium shows a healthy market, but anything lesser or more is worrying.
The resurgence of bitcoin’s price caused the futures premium indicator to reach the upper limit of its neutral zone, which was around 25%.
This showed that traders were excited about the price of bitcoin but were still careful not to dive headfirst into the futures market, and go long in the market.
Bitcoin Options Also Shows That Traders Have a Neutral Sentiment
Financial derivatives have always been a way to measure the markets’ sentient for years, whether we are dealing with stock price or bitcoin price.
The bitcoin options market is like every other derivative, where buyers and sellers who trade with platforms like Redot crypto exchange get the right but not the obligation to buy or sell bitcoin at a specific price at a specified date or time, showing that the market isn’t as bullish or bearish; it is neutral.
The 25% delta skew, an indicator that provides information on whether there is high call or put options in the options market, reveals that bitcoin options traders are neutral.
In a fear-dominated market, the 25% delta skew will be positive, and in an over-confident market, the skew will be negative.
When the readings of a 25% delta skew read -8% and +8%, it shows that the market is operating normally: not too confident, and not too fearful.
In the last 6 months, the 25% delta skew went close to zero, which is indicative of greed from traders, but that isn’t the case.
The problem has not been with sellers; it is the buyers who are still unsure of what to expect from a highly volatile market like the bitcoin market.