Bitcoin Trading: Price Difference Between Monthly Settled BTC Futures Traded on CME and Crypto’s Spot Price Shows Receding Optimism from Traders, Report Claims

The futures basis, the difference in price between monthly settled bitcoin futures traded on the CME and the spot price of bitcoin, is “showing receding optimism from traders,” the team at NYDIG Research notes.

The NYDIG Research team points out that the rolling 1-month futures basis, “expressed in annualized return terms, closed at over 14% during the spot ETF-fueled rally that touched off in mid-June.”

NYDIG adds that since peaking in early July, however, “the futures basis is now down to a low single-digit percent.” Their interpretation of this trend is “that rangebound trading, the inability to sustain momentum over $30K, and a lack of an imminent catalyst during the seasonally slow summer months have dampened trader enthusiasm.”

As mentioned in the NYDIG market report, Bitcoin futures trading “on the CME is considered an important avenue for institutional investors in the US to express views on bitcoin.”

The relationship of the price of futures “relative to spot prices is a vital indicator to understand trader positioning.” When the basis is large and positive, “it usually means that traders are expressing bullish views.” When the basis is negative, futures “are trading below spot, traders are usually expressing pessimistic views.” The report from NYDIG added that it is important to note the basis “tends to be positively correlated with price, with one implication that traders employ trend following or price momentum strategies.”

Implied Volatility Continues to Sink

As stated in the update, Bitcoin’s volatility, “as measured by the implied volatility (IV) of at-the-money (ATM) options, has sunk to new lows amidst rangebound trading and lackluster volumes. IV is a market-based volatility measure based on how ATM options are priced.”

The new low means that options traders “expect the lowest future price volatility since we started collecting the data in 2019.”

The NYDIG Research team also mentioned that second order implication is “that certain strategies, such as in call overwriting (holding spot and selling out of the money calls against it), are receiving some of the lowest premiums since we started collecting the data.”

On the flip side, volatility “is cheap, and strategies such as long straddles or strangles (simultaneously buying calls and put) are cheap relative to historical standards.” And while the end of summer is typically a quiet time for crypto, they know there’s “at least one important event this month, the SEC’s first decision on spot ETF applications.”

Spot Volumes Dry Up

As stated in the research report, trading of bitcoins “on US-based centralized exchanges continues to languish, posting some of their weakest volumes in the recent past.”

There are several factors “likely at play causing this, such as the regulatory overhang, cessation of the banking crisis, summer seasonal effects, banking issues at Binance.US, and declining volatility.”

In contrast, derivatives markets, “such as options, continue to grow.” The likely reason for that is “the growth of sophisticated traders and investment strategies using these financial products.”

They also think the growing awareness “by traditional market investors of some of the unique opportunities available within bitcoin derivatives is another reason.” And while the declining volatility regime may “damper the attractiveness of certain types of derivatives strategies, it opens the door for others, like the ones described in the previous section on volatility.”

As noted in the market report, Bitcoin has “continued its sideways trading, ending the week up 0.3%. Bitcoin traders largely ignored the US credit downgrade by Fitch as well as the drama that is playing out across the DeFi ecosystem caused by a hack and credit worthiness concerns of a major borrower.”

Equities fell “on the week, with the S&P 500 down 0.8% and Nasdaq Composite down 0.6%. Gold fell 0.7% as real yields rose, while oil rose 1.8%.” Bonds were down “on the week, with investment grade corporate bonds down 1.6%, high yield corporate bonds down 0.4%, and long-term US Treasuries down 4.2%.”

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