Metric analysis

Historically Accurate Bitcoin Metric Suggests BTC Price Has Bottomed

As the price of Bitcoin (BTC) tries to establish support at $37,000 on Tuesday, recent lows of $30,000 may have been the lowest, suggests a derivatives market indicator who is used to predicting with precision BTC/USD cyclical lows after its bearish cycles.

The last time he predicted a bottom was on November 1, after which the cost of buying one Bitcoin fell from $13,771 to $64,899 on Coinbase.

Anatomy of a Bullish Indicator

Dubbed the “moving basis,” the indicator mathematically represents the relative difference between the futures contract price and the spot rate over an annual period. For example, if a Bitcoin contract is trading at a 2.5% premium to its spot price on the chart on a three-month basis, then its annualized moving basis becomes 10%.

In retrospect, futures market assets trade either at a discount or at a premium. When the spot rate of an asset is higher than its forward price, it is called a discount. Conversely, when the spot rate is trading below the forward rate – typical of traditional financial markets – it represents the contango (premium) state.

Bitcoin futures markets tend to oscillate between backwardation and contango. An extreme contango often signals a top in a bull market. Conversely, an extreme offset helps find potential lows in a bear market.

For example, in June 2019, the Bitcoin futures market on OKEx saw a contango rise above the 3.5% level. It peaked around 6.8% during the same period Bitcoin broke through $11,000. However, the BTC/USD spot rate continued to rise until it reached $14,000. Subsequently, the pair entered a multi-month bear market, eventually reaching near $3,100 in December 2019.

Example of Bitcoin Futures contango from June 2019. Source: TradingView

Ben Lilly, a crypto-economist at Jarvis Labs, contrasted the reading on the “BTC Futures Annualized Rolling 3 Month Basis” chart against spot Bitcoin prices, noting that when the former approaches or closes below 1%, the latter takes it as a signal to hit bottom and start a new bullish cycle.

The vertical lines indicate the day when Bitcoin’s rollover basis reached 0%. Source: BitMEX

The BitMEX chart above shows several instances where the moving base reading fell below 1% during Bitcoin’s downward moves in the spot market. The cryptocurrency then began to experience a rebound – a new bull cycle – before correcting again to find a new low just as the moving base slipped below 1%. Rinse and repeat.

For example, in March 2020, during the global market crash caused by the coronavirus, Bitcoin futures saw a forward run to just under 14%, which would mark Bitcoin’s bottom in the spot market. at around $3,858.

Moving Basis for Bitcoin Futures as of May 25

Lilly shared a Skew chart that showed the BTC Futures annualized moving basis slipping below 1% for the first time since November 2020.

Bitcoin’s moving basis fell below 1% after May’s crash in spot markets. Source: Skew

“It looks promising in terms of finding a bottom,” Noted Lilly in its newsletter.

“It reminds us why we use financing rates so much. Because just when people think crypto is coming to an end and gone to the stake, it bounces back.

He added that based on the basic readings alone, now is a good time for Bitcoin spot traders to build up, while noting that this does not mean opening leveraged long positions on the futures market.

Risks appeared higher in the derivatives market due to the lack of bullish trades. Lilly said selling pressure hasn’t abated even after 6 billion USD (USDC) coins entered the market – a sign that traders want to use the dollar-pegged stablecoin to buy cryptocurrencies like bitcoin.

“Right now we’re flying in no man’s land,” he added.

The statements emerged as Bitcoin showed extreme short-term bias conflict, recording wild intraday price swings in previous sessions. Monday’s session saw BTC price rejected by resistance at the $40,000 level.

Currently, BTC is trying to find support at $37,000, which is about 40% below the all-time high.