Bitcoin

Is Another Black Thursday Crash on the Horizon for Bitcoin? BTC Derivatives Say the Following

The 51.4 percent drop in Bitcoin’s value in March 2020 was the worst 24-hour black swan occurrence in the digital asset’s history. For investors who were affected by the Black Thursday crash, the recent price activity has most likely revived similar emotions. 

Bitcoin (BTC) price has fallen 29% in the last week, to $42,150, a three-month low. Long contracts worth $5.5 billion were liquidated, setting a new high in absolute terms. Nonetheless, the effect of the March 2020 derivatives crash was orders of magnitude greater

We’ll start by looking at the perpetual futures premium to see if the current correction is less serious than the one in March 2020. These contracts, also known as inverse swaps, adjust every eight hours, allowing any price disparity with conventional spot markets to be easily bridged. 

Price discrepancies may occur during panicked moments when traders are concerned about the derivatives exchange’s liquidity or market makers’ ability to participate during periods of severe volatility.

The price of Bitcoin perpetual futures began a much greater decline on March 12, 2020, than the price on spot exchanges. This move can be explained in part by the recent cascading liquidations, which resulted in a backlog of massive sell orders that were unable to find liquidity at fair rates. 

As a result of the carnage, futures perpetual contracts are now traded at a 12 percent discount to standard spot exchanges. BitMEX, the world’s largest derivatives exchange at the time, went down for 25 minutes, creating chaos as investors became concerned about the market’s liquidity. 

When comparing this case to the previous week, it becomes clear that sustained price differences are extremely rare.

Take note of how, on May 13, perpetual contracts experienced a peak discount of 4% versus daily spot exchanges, which lasted less than five minutes. Market makers and arbitrage desks may have been caught off guard, but they were able to quickly reclaim liquidity by purchasing perpetual contracts at a discount. 

The 25% delta skew is the best metric for determining the effect of such crashes on skilled traders because it measures the price of equivalent call (buy) and put (sell) options. Market makers and whales claim a higher premium for neutral-to-bearish put options when they believe Bitcoin’s price will crash. The 25 percent delta skew shifts favourably as a result of this movement.

In March 2020, the one-month Bitcoin options delta skew reached a mind-boggling 59 percent high. This data reveals complete fear and an inability to price put (sell) options, resulting in the resulting distortion. Even if the intraday peak is excluded, the 25 percent delta skew showed sustained periods of 20 or more, suggesting intense “fear.”

The skew indicator reached a high of 14 percent this week, which isn’t far from the “neutral” range of -10 percent to +10 percent. It is a significant change from the previous months’ pessimistic skew, reflecting optimism, but it is not unusual. 

As a result, while the recent 29 percent price drop in seven days might have been disastrous for leveraged traders, the effect on derivatives has been minor. 

This data indicates that the market has been extremely resilient recently, but this resilience could be put to the test if Bitcoin’s price continues to fall.

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Qadir AK

Qadir Ak is the founder of Coinpedia. He has over a decade of experience writing about technology and has been covering the blockchain and cryptocurrency space since 2010. He has also interviewed a few prominent experts within the cryptocurrency space.

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