Three Risk Signals Suggest Bitcoin Could Fall Below $90,000Bitcoin (BTC) failed to break through the $100,000 mark, dropping overnight to $94,500, raising concerns about the near-term market trend. Several key indicators suggest a further correction, potentially pushing the price below $90,000
Three Risk Signals Suggest Bitcoin Could Fall Below $90,000
Bitcoin (BTC) failed to break through the $100,000 mark, dropping overnight to $94,500, raising concerns about the near-term market trend. Several key indicators suggest a further correction, potentially pushing the price below $90,000. This article explores three significant risk signals to help readers understand the current market dynamics and potential risks.
I. 25-Delta Risk Reversal: Bearish Sentiment Dominates
The first warning signal comes from the 25-delta risk reversal indicator. This metric measures the difference in volatility premiums between call options (betting on price increases) and put options (providing downside protection). According to data provider Amberdata, on Deribit exchange, call options expiring this Friday traded below put options, resulting in a negative risk reversal. This is the first negative reading in at least a month, clearly indicating a bearish market sentiment with investors favoring put options for risk hedging.
This is not an isolated incident. On Monday, traders sold call option spreads and bought put options related to BTC on the over-the-counter liquidity network Paradigm, further confirming the strengthening bearish sentiment. This suggests that some professional traders anticipate a sustained price decline.
Further observation of the 24-hour change in the 25-day risk reversal (25RR) reveals weakening bullish option preference across different timeframes. Last week, December and January expiry call options commanded a higher premium relative to put options; however, this premium gap has significantly narrowed. This indicates a weakening market expectation of future price increases.
25-Delta Risk Reversal Explained:
To better understand the 25-Delta risk reversal indicator, we need to understand its components: Delta and Risk Reversal.
- Delta: In options trading, Delta represents the sensitivity of an option's price to changes in the underlying asset's price. Its value ranges from -1 to 1. For example, a 25-Delta call option means the option's Delta is 0.25, implying that for every $1 increase in the underlying asset's price, the option price increases by approximately $0.25.
- Risk Reversal: A risk reversal measures market risk appetite by comparing the implied volatility of 25-Delta call options and 25-Delta put options. If the implied volatility of 25-Delta call options is higher than that of 25-Delta put options, the risk reversal is positive, indicating a bullish market bias. Conversely, a negative 25-Delta risk reversal indicates a bearish market bias, reflecting a stronger expectation of a price decline.
A negative 25-Delta risk reversal indicates heightened market concerns about future price declines, with investors actively seeking risk-hedging strategies. This provides a significant risk warning for a potential Bitcoin price correction.
II. Coinbase Premium Disappears: Weak US Market Demand
The second noteworthy signal is the disappearance of the Coinbase premium. Following the US election, Bitcoin prices surged from $70,000 to $99,500, with US market demand playing a crucial role. However, this phenomenon has now vanished.
Currently, Bitcoin trades at a lower price on Nasdaq-listed Coinbase than on Binance, indicating weakening US demand for BTC. This price discrepancy, in turn, affects the Coinbase premium indicator, causing a negative change.
Furthermore, a bearish order book imbalance exacerbates market caution, increasing investor concerns about potential negative news. The weakening US market demand directly impacts the overall price support for Bitcoin, increasing the likelihood of a price drop.
III. RSI Divergence: Signs of Exhausted Momentum
The third signal is a Relative Strength Index (RSI) divergence. RSI is a momentum oscillator used to gauge the overbought or oversold conditions of an asset's price. An RSI divergence occurs when the asset's price moves contrary to the momentum oscillator.
In Bitcoin's case, although the price broke above $99,000 on Friday, the RSI did not rise concurrently; instead, a bearish divergence occurred. This suggests that the current upward momentum has been exhausted, increasing the likelihood of a price correction.
Daily candlestick charts and intraday RSI charts suggest Bitcoin might find support between $87,000 and $88,000. This implies a potentially significant price pullback, finding support in this range, even if long-term technical analysis remains bullish. The appearance of RSI divergence visually reflects the exhaustion of market momentum, further increasing the risk of a Bitcoin price decline.
Conclusion:
Combining these three risk signals a negative 25-Delta risk reversal, the disappearance of the Coinbase premium, and RSI divergence suggests that Bitcoin faces the risk of a further correction, with a drop below $90,000 being a possibility. While long-term technical analysis may remain bullish, the short-term risks are significant. Investors should carefully monitor market dynamics and make investment decisions based on their own risk tolerance.
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