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

Bitcoin (BTC) traders saw continued downward pressure following the 5.5% drop in BTC price on March 7. Increased chances of further interest rate hikes from the Federal Reserve and regulatory pressure on cryptocurrencies explain some of the movement.

Financial markets showed signs of strain as the inverted bond yield curve hit its highest level since the 1980s. Longer-dated yields settled at 4%, while two-year Treasuries traded above 5% yield in March.

Since July, longer-term Treasury yields have failed to keep up with the rising two-year benchmark, leading to an inverted curve distortion that typically precedes economic downturns. According to Bloomberg, indicator hit 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 to slow the economy and reduce inflation to near 2%.”

Fear of cryptocurrency regulation is growing

According to a Wall Street Journal report, the Biden administration is asking apply the wash sell rule to cryptowhich would end a strategy where a trader sells and then immediately buys digital assets for tax purposes.

Additionally, the Public Company Accounting Oversight Board (PCAOB), an organization that oversees audits of public companies in the United States, recently released warning to investors for proof of reserves reports that audit firms send.

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

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

Bitcoin margin markets are back to normal

Margin markets provide insight into how professional traders are positioned because they allow investors to borrow cryptocurrency to increase their positions.

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

The chart above shows that the OKX trader margin ratio fell sharply on March 9, moving away from a situation that had previously favored long leveraged positions. Given the general bullish sentiment of crypto traders, the current margin lending ratio at 16 is relatively neutral.

On the other hand, a margin lending ratio above 40 is very rare, although it has been the norm since February 22. This is partly due to high loan cost for stablecoins of 25% per annum. After the recent margin anomaly, the market has returned to a neutral to bullish state.

Option traders set prices at low risk of extreme price corrections

Traders should also analyze the options markets to see if the recent correction has made investors more risk-averse. A 25% delta skew is a telltale sign when arbitrage desks and market makers are overpricing for upside or downside protection.

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

In short, if traders expect the price of Bitcoin to fall, the skew indicator will rise above 10%, and the general excitement has a negative skew of 10%.

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

Derivatives data shows that professional traders are reluctant to go to the downside, as evidenced by the option traders’ risk-neutral rating. Additionally, the margin lending ratio shows that the market is improving as some bearish demand has emerged, but the structure remains neutral to bullish.

Given the enormous downward pressure on prices from a macroeconomic perspective, as well as ongoing regulatory pressure in the United States, bulls should probably be pleased that Bitcoin derivatives have remained stable.