Bitcoin futures premium hits 7-week high: Is the rally sustainable?

On June 3, BTC rose 2.5% to $69,400, sparking hopes that it could reclaim $69,000 support for the first time in 11 days. This positive price action coincided with a surge in Bitcoin futures premiums to their highest level in seven weeks. But what does this mean for the sustainability of Bitcoin’s rally toward $70,000?

GME mania and the likelihood of a Fed rate cut decreases

Some analysts believe that Bitcoin’s recent price gains were partially influenced by GameStop’s (GME) impressive 36% gain. GameStop’s surge is reminiscent of the anti-traditional financial sentiment of 2021, when retail investors united to challenge the status quo. That sentiment appears to have spread to the memecoin space, with Floki up 16.5%, Dogwifhat (WIF) up 9%, and Bonk up 7.5%.

Additionally, comments from Neel Kashkari of the Minneapolis Federal Reserve Bank (Fed) added to the uncertainty. The Fed official said he does not expect to cut interest rates in the short term, citing Americans' strong aversion to inflation. Although this stance is not universally shared by Fed officials, it is seen as negative for real estate and the stock market. As a result, some investors have turned to alternative investments such as Bitcoin.

Global geopolitical tensions have also had an impact on Bitcoin's recent price action. Australia's decision to require Chinese investors to reduce their stake in a rare earth miner has added to global market uncertainty. Meanwhile, gold prices rose 1% and U.S. Treasuries sold off, with the 5-year Treasury yield falling to 4.42% from 4.59% on May 31.

Bitcoin derivatives support further price gains

The Bitcoin futures premium reflects the difference between the derivatives market's monthly contracts and the spot level on regular exchanges. Typically, an annualized premium (basis) of 5% to 10% occurs to compensate for deferred settlement. Essentially, a higher premium indicates that traders are willing to pay more for future contracts, indicating bullish sentiment.

Bitcoin 3-month futures annualized premium. Source: Laevitas.ch

The Bitcoin 3-month futures premium rose to 15%, the highest level in seven weeks. This indicates that traders’ sentiment is cautiously optimistic, which is crucial to avoid cascading liquidations during unexpected negative price fluctuations. However, to infer whether this sentiment exists only in the futures market, the 25% delta deviation of Bitcoin options should be analyzed.

Delta deviation measures the relative demand for call and put options. A negative deviation indicates higher demand for call options (buys), while a positive deviation indicates a preference for put options (sells). A neutral market typically holds a delta deviation of -7% to +7%, indicating a balance in pricing between call and put options.

25% delta deviation for Bitcoin 2-month options. Source: Laevitas.ch

Note that the 25% delta deviation indicator has remained stable around -3% over the past week, suggesting that traders are neither overly optimistic nor overly pessimistic about Bitcoin’s short-term price action. The last time Bitcoin options showed signs of optimism was on May 21, but it was short-lived as resistance at $71,500 proved difficult to overcome.

Recent data shows that the Bitcoin market is healthy, with demand driven by a variety of factors, including recession fears, geopolitical uncertainty, and a resurgence of anti-traditional financial sentiment. Key indicators such as the Bitcoin futures premium and 25% delta deviation indicate that traders are cautiously optimistic, providing a stable foundation for prices to further break through $70,000.