Bitcoin is in its “transitionary phase,” analysts say, marked by lower leverage, fewer short-term speculators — and less volatile price
Bitcoin (BTC) might be less exciting when it comes to price action over the coming weeks, if the derivatives market is anything to go by.
Bitcoin options are flashing signs of decreasing volatility while sizable chunks of leverage have been pulled, according to Bitfinex analysts.
Abundant leverage in bitcoin derivatives markets was a major contributor to volatility over the past week, per a Monday research note. Now that the leverage is gone, we could be in for sideways trading moving forward.
Bitcoin is hovering around $28,000, down 5% over the past five days but practically even over the past month.
Granted, there has been substantial growth in open interest for bitcoin and ether derivatives this year. But open interest has been falling over the past three weeks, leading to the forced closure of both short and long positions, the analysts noted.
BTC options’ open interest has dropped from around $12.76 billion on Apr. 11 (three weeks ago) to current levels near $11.48 billion, CoinGlass data shows.
Bitcoin ‘tourists’ out, local price bottoms in
The “Estimated Leverage Ratio” measures leverage in the bitcoin market. The ratio dropped to a low of 0.195 last week — a reading not seen since Dec. 20, 2021.
At the time, Bitcoin had just crashed 12% in a matter of days, from $56,500 to $49,500, which coincided with reduced leverage.
Implied volatility has also dipped to near historical lows set earlier this year, ranging between 48% and 55% for seven, 30, 90, and 180-day expiries.
Implied volatility indicates how the market is estimating the future volatility of the underlying asset, in this case bitcoin. It’s based on the current price of options contracts.
Low implied volatility suggests a possible return to an era dominated by the spot market, similar to early 2023, Bitfinex said.
Both metrics support the theory that bitcoin is in a “transitionary phase,” marked by a pause in price movement and decreased leverage alongside fewer short-term speculators.
“In transitionary phases for bitcoin historically, the elimination of speculators and bitcoin ‘tourists’ has been associated with the market forming a short-term low,” Bitfinex analysts said.
A rebound typically follows, according to Bitfinex, after which a fresh wave of investors and speculators enters the market, driven by price momentum and FOMO (fear of missing out).