December continued to see Bitcoin trade below its 50-, 100- and 200-day moving averages, but stabilization in the DeFi sector is flashing positive signals at the start of 2023.
2022 was a rollercoaster ride of ups and downs for the blockchain industry. While the year’s first quarter looked promising, the crypto industry has been on a downward trajectory ever since. While indications of a global macroeconomic slowdown increase, these headwinds hamper the blockchain industry’s potential recovery.
There are some signs of stabilization in the crypto market and a potential upside at the start of the new year. For those serious about understanding the crypto space’s different sectors, including venture capital, derivatives, decentralized finance (DeFi), regulations and much more, Cointelegraph Research publishes a monthly Investors Insights report. Compiled by leading experts on these various topics, the monthly reports are an invaluable tool to quickly get a sense of the current state of the blockchain industry.
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Bitcoin weakness in 2023?
Following positive Consumer Price Index news on Dec. 13, Bitcoin (BTC) saw a temporary price bounce to $18,300. Still, despite the bulls’ best efforts, BTC has not been able to post a daily close above $18,000 since Nov. 9, 2022. As a tumultuous year in crypto came to a close, BTC’s price stayed within the $15,000 to $17,000 range, which handed a win to bears after the Dec. 30 options expiry, when bulls needed to push the price above $18,000 to avoid a potential $340 million loss heading into 2023.
BTC had gained 1,650% after bottoming out in March 2020 below $4,000, boosted by the United States Federal Reserve’s quantitative easing policy. Even as of Dec. 31, 2022, investors who purchased BTC in March 2020 are sitting on roughly 330% profits. Since the FTX collapse, BTC’s price has not recovered. The price drop to levels last seen two years ago is causing problems for long and short-term holders, with over 8 million BTC now held at a loss and declining whale interest showing weak price strength.
Bitcoin derivatives market reversal?
Skew is a key measure of market sentiment and capital flows because it encapsulates what people are willing to pay to acquire an asymmetric payout on either the upward or downward direction of the market. The most common measure of skew is the 25 delta (25D). It involves comparing the implied volatility of the out-of-the-money (OTM) call with a 25% delta against the OTM put with a 25% delta.
Delta can be understood as the probability that the option will expire in the money. A $16,000 one-week call with a price of $16,500 would have a near-100% delta, while a $36,000 one-week call would have a near-0% delta. This is because it is a near-certainty that the $16,000 call would remain in-the-money, while the $36,000 would remain OTM, given the usual volatility.
Below is a chart of 1 million 25D Bitcoin options skew since February 2021. The Y-axis measures the difference in implied volatility between the 25D call and the 25D put of the same expiry. Negative skew means the market wants to pay to hedge against further downside risk in the spot price of Bitcoin. Over the last two years, the average of the 25D has been increasing, signaling rising bearish sentiment. However, the 25D has improved by 46% since November, indicating that traders are becoming slightly more optimistic.
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