In Depth: 4 Key Metrics Reflect Professional Traders Extremely Bullish on Bitcoin

Most investors paying attention to Bitcoin have heard of the growing influence of the Bitcoin futures and options market on the price of Bitcoin lately. The same goes for price volatility caused by liquidations on the OKEx and Huobi exchanges.

Given that the derivatives market now plays a larger role in bitcoin’s price swings, it has become increasingly necessary to assess some of the key metrics that professional traders use to gauge market activity.

While evaluating futures and options contracts can be quite complex, the average retail investor can still benefit from understanding how to properly interpret contango, funding rates, skew and put/call ratios for options.

Contango

Contango measures the price of a long-term futures contract relative to the current spot price in traditional markets. It can be seen as a relative reflection of investor optimism, with futures often trading at slightly higher prices than spot exchanges.

In a healthy market, the premium on two-month futures should range between 0.8% and 2.3%, with anything above that range indicating extreme optimism. Meanwhile, the absence of a premium in futures suggests investors are bearish.

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BTC 2-month futures contract premium Source: Digital Assets Data

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The past week has been a rollercoaster ride, with the contango reaching 2% on Nov. 24, while the Bitcoin price peaked at $19,434.

Even though the premium is currently at 1.1%, more importantly, the metric remains above 0.8% despite a 14% drop. Generally, investors see this level as bullish and yesterday we could see the Bitcoin price hit new highs above $19,900.

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Perpetual Futures Contract Funding Rate

Funding fees for perpetual futures contracts are typically charged every eight hours. Funding rates ensure there is no trade imbalance risk. Leverage can vary even if the open interest of buyers and sellers remains the same throughout.

The funding rate is positive when the buyer (long) is using more leverage. Therefore, these buyers will pay higher fees. This question is especially important during bull markets, when demand from bulls is usually stronger.

Funding rates above 2% per week suggest extreme optimism. This level is acceptable during a rising market, but if the Bitcoin price is sideways or in a downtrend, this level is problematic.

In this case, high leverage on the buyer side creates the potential for substantial liquidation during an unexpected price drop.

BTC Perpetual Contract Funding Rate Source: Digital Assets Data

Note that despite the recent bull run, the weekly funding rate remains below 2%. The data suggested that despite traders' optimism, buyers were not overleveraged. Again, during the $1,400 drop on Nov. 26, this indicator remained at a healthy neutral level.

Option skew

Unlike futures contracts, options come in two parts. A call option allows the buyer to buy bitcoin at a fixed price on the expiration date. On the other hand, the seller of the option will be obliged to sell bitcoins.

The 25% delta skew for options compares equivalent call (buy) and put (sell) options. If it is more costly to use call options to prevent price increases, the skew indicator will go into a negative range. The opposite happens when investors are bearish, causing puts to trade at a premium, causing a positive shift in the skew indicator.

Oscillations between -15% (slightly bullish) to +15% (slightly bearish) are typical and expected. It is very unusual for most markets to be flat or close to zero most of the time.

Therefore, traders should monitor for more extreme scenarios, as they may indicate that market makers are unwilling to take risk on either side.

3-month BTC option 25% Delta skew Source: Skew.com

The above chart shows that options traders have been reluctant to enter into short positions since November 5. Therefore, traders will view this as a very bullish scenario.

Put/Call Ratio

By gauging whether more trades are being made through calls or puts, it is possible to gauge the overall market sentiment. Generally, calls are used for bullish strategies and puts are used for bearish strategies.

The puts-to-calls ratio is 0.70, indicating that there are 30% fewer puts than calls open interest and are therefore bullish.

In contrast, the puts-to-calls ratio is 1.2, indicating that there are 20% more puts than calls open interest, which could be considered bearish. One thing to note is that this indicator aggregates the entire Bitcoin options market.

Put/Call Ratio for BTC Options Source: Skew.com

With conditions like this in the market right now, it's only natural for investors to seek downside protection as Bitcoin trades above $19,000, even though the put/call ratio is well below its six-month average of 0.90. The current level of 0.64 suggests that professional traders are not pessimistic.

Overall, these four key indicators remain stable, especially considering that the market has just suffered a traumatic pullback, with Bitcoin falling to $16,200.

With the price of Bitcoin once again breaking above $19,500, almost all investors are wondering whether Bitcoin has enough strength to break its all-time high this week.

From a derivatives trading perspective, there is nothing stopping it.

Cointelegraph Chinese is a blockchain news information platform, and the information provided only represents the author's personal opinion, has nothing to do with the position of the Cointelegraph Chinese platform, and does not constitute any investment and financial advice. If you need to reprint, please contact the Chinese staff of Cointelegraph.

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