‘Overly optimistic’ Bitcoin traders washed out as BTC futures turn ‘neutral’

Bitcoin (BTC) price plunged 10.8% between Aug. 25 and Aug. 27 after briefly exceeding $65,000. The downturn has been linked to concerns of a possible recession in the United States and excessive optimism in the stock market, as highlighted by Goldman Sachs’ head of asset allocation in an Aug. 28 CNBC interview.

Bitcoin falters on fears that investors’ are too optimistic 

Although Bitcoin eventually reclaimed the $58,500 support, traders’ morale was significantly affected, as the primary gauge of appetite for leveraged longs fell to its lowest level in ten months. This indicator flipped to neutral on Aug. 28, but traders believe that bulls will need more time to regain their confidence, which could lead to further price corrections.

Goldman’s Christian Mueller-Glissmann noted that investors should view the Aug. 5 global market crash, triggered by Japan’s central bank decision, as “a warning shot.” Mueller-Glissmann added in the CNBC interview that “we are sadly nearly back to the same problem we were at a month ago.” Essentially, there is excessive optimism despite mixed macroeconomic data.

Some might argue that a 10% price swing over two days is not unusual for Bitcoin, and recent historical data confirms that BTC volatility has been increasing, leading to more frequent unexpected moves. However, this analysis overlooks the impact on leveraged positions in Bitcoin futures markets.

Data shows that Bitcoin’s annualized volatility surged above 65% earlier in August, significantly higher than the 24% to 52% range seen in the previous two months. To provide context, the S&P 500 index volatility peaked at 27% in mid-August, its highest level since December 2022. However, as previously mentioned, cryptocurrency traders tend to be overly optimistic and rely too heavily on leveraged positions.

To assess the impact of Bitcoin’s drop below $60,000 on professional traders, one should examine the BTC futures markets. 

Bitcoin futures premium collapsed while stablecoin demand stagnated

Under neutral conditions, monthly contracts should trade at a 5% to 10% annualized premium to account for the longer settlement period. Any reading below this level is interpreted as bearish, given that crypto traders naturally tend to be optimistic.

The Bitcoin futures premium briefly fell below the 5% neutral threshold on Aug. 27, reaching its lowest level since October 2023. After the $58,500 support showed strength, demand for bullish bets resumed, and the indicator rose to a healthy 6% level. Nevertheless, the impact was reflected in the reduction of aggregate Bitcoin futures open interest, which has declined by 4% since Aug. 26, to the current 517,430 BTC, according to Coinglass data.

Forced liquidations resulted in $102 million of leveraged Bitcoin longs being terminated within 48 hours, which is relatively small given the significant price movement. In comparison, the Aug. 5 crash led to $311 million in leveraged bullish positions being liquidated within the same 48-hour window. Therefore, it would be incorrect to claim that the recent drop to $57,920 drastically altered the positioning of whales and arbitrage desks, but it certainly made traders more risk-averse.

To confirm whether the sentiment is isolated to Bitcoin futures markets, one should assess the broader appeal of cryptocurrencies. Typically, strong retail demand for cryptocurrencies in China causes stablecoins to trade at a premium of 2% or more above the official US dollar rate. Conversely, a discount often signals fear, as traders become eager to exit crypto markets.

Related: Bitcoin strength wanes as crypto market stuck in 5 month ‘structurally ordered downtrend’

The USD Tether (USDT) premium in China slightly improved between Aug. 26 and Aug. 28 but remained neutral, hovering close to 0%. The discount that had persisted since Aug. 21 has been eliminated, but there are no clear signs of renewed demand in China. Ultimately, Bitcoin traders seem far from desperate at $59,000, yet unsurprised that the $64,000 support did not hold.