BTC is on track to beat it’s all time record of 10 green daily candles in a row, gaining bullish momentum after last week’s low of 29k. The sudden move higher was likely a combination of multiple factors which we discuss in more detail below, but in short, retail traders were positioned heavily bearish at range lows, while short term idiosyncrasies in the derivatives market led to a short and gamma squeeze as weekend volume remained thin.
Strong divergences between exchanges, FTX & Deribit heavily bid while retail & Chinese focused exchanges were well offered
Normally activity across exchanges will look very similar, but over the weekend we noticed a distinct disconnect where FTX and Deribit were heavily bid, driving the perp funding rate as high as 12% annualized. At the same time, exchanges like Binance and Huobi were seeing shorts double down on their positions as funding remained negative. The move could be explained by Deribit and FTX being classed as the “pro trader” exchanges while Binance etc are mostly retail focused, as well as the idea that the former are more Western centric, with Chinese sentiment still risk-off and potentially adding to the strong selling on exchanges such as Huobi.
A strong increase in front expiry call options into the weekend
BTC had a modest recovery from 29k, to end Friday at 32k on relatively low volume. As we headed into the weekend, we saw an unusual increase in buying for 30-Jul call options, mostly with 40–45k strikes. This strong jump in short term call volume, combined with the bearish sentiment likely helped create a small gamma squeeze, to push the market higher on Sunday as market makers were forced to hedge by buying BTC on much lower weekend liquidity.
Consistent negative perp funding and weak futures basis show how bearish the market was positioned
Despite the small bounce to defend 30k support, sellers were still happy to pay longs to keep their shorts open, and the weak 3% Sept futures basis reflected the lack of demand for derivatives across the curve. As buyers started to strengthen on Sunday, a short squeeze exaggerated the move higher, with over $900m in liquidations. The majority of this was on retail exchanges too, adding weight to the narrative that retail getting caught offside exaggerated the move higher.
So, how does the market look now?
The market looks significantly more constructive as we currently hold the 40k level. Funding rates turn positive across all exchanges, showing the demand from buyers has returned, while the 3 month futures basis has also extended to levels of 7%, again showing that genuine demand is supporting the rally as open interest climbs higher across all products. At the same time, spot BTC and ETH continues to leave exchanges at a record rate, with reserves at the lowest levels this year.
Options continue to show a significantly more positive outlook from last week too, with a strong amount of demand for 44–50k August and 60–100k Sept calls. 70% of the traded options volume this week has been for calls, with the skew showing the demand for downside protection has evaporated, with calls now trading at a premium.
Another sign of genuine demand coming back to the market is the GBTC discount, a metric that can show signs of institutional interest for BTC. GBTC was trading as wide as -20% to NAV in mid-June, with this week’s rally narrowing it to -6%, suggesting that bigger players have a more bullish outlook, and would therefore gain on both BTC trading higher and also GBTC trading at a premium.
Overall, sentiment has had a U-turn from the previous weeks of low volume sideways movement, although it will remain fragile until we can break the 30–40k range for good. Alts have been patiently waiting on the side-lines for further confirmation from BTC, with even ETH/BTC grinding to a 1 month low. A break of 42k for BTC will be a significant bullish signal for the entire market, which would feed through to the smaller caps as major coins gain more confidence.