Bitcoin price drops to $20.8K as regulatory and macroeconomic pressures mount

Bitcoin (BTC) traders saw continued downward pressure following the 5.5% fall in the BTC price on March 7. A greater likelihood of further rate hikes by the Federal Reserve and regulatory pressure in cryptocurrencies explain part of the move.

Financial markets showed signs of stress as the inverted bond curve reached its highest level since the 1980s. Longer-term yields have stalled at 4%, while two-year Treasuries traded above 5% in March.

Since July, longer-maturity government bond yields have failed to keep pace with the fast-rising two-year benchmark, leading to the inverse curve bias that typically precedes economic downturns. According to Bloomberg, the indicator reached a full percentage point on March 7, the highest level since 1981, when Fed Chairman Paul Volcker faced double-digit inflation.

This week, BlackRock, the world’s largest asset manager, raised its forecast for US federal funds to 6%. Rick Riede, chief investment officer of Global Fixed Income at BlackRock, believes the Fed will “keep interest rates high for an extended period of time to slow the economy and bring inflation back to near 2%.”

Fear of cryptocurrency regulation is growing

According to a Wall Street Journal report, the Biden administration wants to apply the wash-sale rule to crypto, which would end a strategy where a trader sells digital assets and then buys them immediately for tax purposes.

In addition, the Public Company Accounting Oversight Board (PCAOB), an organization that oversees audits of publicly traded companies in the United States, recently issued a warning to investors about proof-of-reserves reports that accounting firms send out.

The organization, backed by the US Securities and Exchange Commission (SEC), said that: “investors should note that PoR engagements are not audits and, consequently, the related reports do not provide meaningful assurance.”

Let’s take a look at derivatives metrics to better understand how professional traders are positioned in the current market conditions.

Bitcoin margin markets have returned to normal

Margin markets provide insight into how professional traders are positioned, as it allows investors to borrow cryptocurrency to leverage their positions.

For example, one can increase exposure by borrowing stablecoins and buying Bitcoin. Bitcoin borrowers, on the other hand, can only make short bets against the cryptocurrency.

OKX stablecoin/BTC margin lending ratio. Source: OKX

The chart above shows that the margin lending ratio of OKX traders dropped dramatically on March 9, moving away from a situation that previously favored leveraged long positions. Given the general bullishness of crypto traders, the current margin lending ratio of 16 is relatively neutral.

On the other hand, a margin lending ratio above 40 is very rare, even though it has been the norm since February 22. It is partly caused by high borrowing costs for stablecoins of 25% per year. After the recent anomaly, the margin market has returned to a neutral to bullish state.

Options traders are pricing in a low risk of extreme price corrections

Traders should also analyze options markets to understand whether the recent correction has caused investors to become more risk averse. The 25% delta skew is a telling sign when arbitrage desks and market makers are charging too much for upside or downside protection.

The indicator compares similar call (buy) and put (sell) options and will turn positive when there is fear because the premium for protective put options is higher than the premium for risky call options.

Basically, if traders expect a price drop in Bitcoin, the skew metric will rise above 10% and overall excitement will have a negative 10% skew.

Related: US REPO task force lists crypto as a target in efforts involving $58 billion in sanctioned assets

Bitcoin 60-day options 25% delta skew: Source: Laevitas

While Bitcoin failed to break the USD 25,000 resistance on Feb. 21 and then suffered a 14% correction in 16 days, the 25% delta skew remained in the neutral zone over the past month. The current positive skew of 3% indicates balanced demand for bullish and bearish option instruments.

Derivatives data shows that professional traders are unwilling to go bearish, as evidenced by options traders’ neutral risk rating. In addition, the margin lending ratio indicates that the market is improving as some demand for bearish bets has emerged, but the structure remains neutral to bullish.

Given the massive downward price pressure from a macroeconomic standpoint, as well as continued regulatory pressure in the United States, bulls should probably be satisfied that Bitcoin derivatives have remained solid.