Most investors that follow Bitcoin will have recently heard about the growing impact Bitcoin (BTC) futures and options markets have on Bitcoin price. The same can be said for the price swings caused by liquidations at OKEx and Huobi exchanges.
Considering that derivatives markets are now playing a much bigger role in Bitcoin price fluctuations, it is becoming increasingly necessary to review some of the key metrics professional traders use to gauge activity in the markets.
While reviewing futures and options contracts can be quite complicated, the average retail trader can still benefit from knowing how to properly interpret the futures premium, funding rate, options skew and put-call ratio.
The futures premium measures how expensive longer-term futures contracts are to the current spot at traditional markets. It can be thought of as a relative reflection of investor optimism, and fixed-calendar futures tend to trade at a slight premium to regular spot exchanges.
The 2-month futures should trade with a 0.8% to 2.3% premium in healthy markets, and any number above this range denotes extreme optimism. Meanwhile, the lack of a futures premium indicates bearishness.
BTC 2-month future contracts premium. Source: Digital Assets Data
The past week was a roller coaster and the indicator reached 2% on Nov. 24 while Bitcoin price peaked at $19,434.
Even though the premium currently sits at 1.1%, what is more significant is that despite a 14% price drop, the indicator held above 0.8%. Generally, investors view this level as bullish, and today we can see that Bitcoin price secured a new high above $19,900.
Perpetual futures funding rate
Perpetual contracts, also known as inverse swaps, have an embedded rate usually charged every eight hours. Funding rates ensure there are no exchange risk imbalances. Even though both buyers and sellers open interest is matched at all times, leverage can vary.
When buyers (longs) are the ones demanding more leverage, the funding rate goes positive. Therefore, those buyers will be the ones paying up the fees. This issue holds especially true under bull run periods, when usually there's more dema ...
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