Hawkish Fed comments and Bitcoin derivatives data point to further BTC downside

A $750 pump on Aug. 26 took Bitcoin (BTC) from $21,120 to $21,870 in less than two hours. However, the movement was completely erased after comments from U.S. Federal Reserve Chair Jerome Powell reiterated the bank’s commitment to contain inflation by tightening the economy. Following Powell’s speech, BTC price dropped as low as $20,700. 

At Jackson Hole, Powell specifically mentioned that "the historical record cautions strongly against prematurely loosening policy." Right after those remarks, the U.S. stock market indexes reacted negatively, with the S&P 500 dropping 2.2% within the hour.

On the Bitcoin chart, the affable “Bart candle,” a reference to the shape of Bart Simpson’s head, and a descriptor of BTC’s up and down price action, surfaced. Outside of these unpredictable technical analysis indicators, there are other indicators that pointed to Bitcon’s broader neutral-to-bearish sentiment.

Regulators up the pace on crypto legislation

Newsflow for cryptocurrencies has been negative for quite some time and this is also weighing on investor sentiment. On Aug. 24, the U.S. Federal Deposit Insurance Corporation (FDIC) issued cease and desist letters to five companies for allegedly making false representations about deposit insurance related to cryptocurrencies, including FTX US.

On Aug. 25, India-based crypto exchange CoinSwitch had its premises searched by Anti-Money Laundering agents over alleged violations of forex laws. Launched in India in 2020, CoinSwitch successfully raised capital from Coinbase Ventures, Andreessen Horowitz, Sequoia and Tiger Global.

Lastly, on Aug. 26, the U.S. Securities and Exchange Commission postponed a decision for a Bitcoin spot exchange-traded fund (ETF) by global investment firm VanEck. Even though the approval odds were remote, it reinforced the anti-crypto sentiment from the regulator.

Consequently, crypto investors are faced with lingering uncertainty despite the seemingly helpful inflationary scenario, which should favor supply capped assets. For this reason, analyzing crypto derivatives is essential to understanding whether investors have been pricing higher odds of a downturn.

Pro traders were neutral-to-bearish ahead of the dump

Retail traders usually avoid quarterly futures due to their price difference from spot markets. Still, they are professional traders' preferred instruments because they prevent the perpetual fluctuation of funding rates that often occurs in a contract.

In healthy markets, the indicator should trade at a 4% to 8% annualized premium to cover costs and associated risks. Yet, that has not been the case because the Bitcoin futures premium remained below 1.8% the entire time. This data reflects professional traders' unwillingness to add leveraged long (bull) positions.

Related: CME Bitcoin futures see record discount amid 'very bearish sentiment'

One must also analyze the Bitcoin options markets to exclude externalities specific to the futures instrument. For example, the 25% delta skew is a telling sign when market makers and arbitrage desks are overcharging for upside or downside protection.

In bear markets, options investors give higher odds for a price dump, causing the skew indicator to rise above 12%. The 30-day delta skew had been ranging near the neutral-to-bearish threshold since Aug. 22, signaling options traders were less inclined to offer downside protection.

These two derivatives metrics suggest that the Bitcoin price dump on Aug. 26 might have followed the traditional stock market performance, but crypto traders were definitely not expecting a positive move.

Derivatives data leaves no room for bullish interpretations because the sentiment worsened after Powell’s comments and they further indicate weakening market conditions.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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