Despite Bitcoin’s consolidation, traders remain bullish

Aside from a brief test of $18,100 on Dec. 1, Bitcoin (BTC) markets have remained relatively quiet over the week, suggesting that investors are beginning to realize that the cryptocurrency could be in for a longer period of consolidation following its 77% rally since October.

BTC/USD 4-hour chart Source: TradingView

Whenever the Bitcoin price stabilizes, expectations for altcoins to rebound are always growing. But that has not been the case recently, with Bitcoin’s dominance increasing by 0.8% this week to 63.6%.

This movement suggests that investors are either waiting for a breakout of the $20,000 resistance level or are worried about a possible negative price swing. Therefore, this movement suggests that their confidence in altcoins has waned.

Weekly performance of the top 16 cryptocurrencies Source: Nomics & CoinMarketCap

The chart above shows how Bitcoin has gained market share this week. With the exception of Nem (XEM), the rest of the altcoins are up 0.5%. Overall, trading volumes have been disappointing, though this is partly due to Bitcoin hovering around $19,200.

Whenever traders are hesitant, they reduce their positions and wait for a better entry point. Therefore, this week's drop in volume is a correction rather than a lack of interest.

Institutional Investors Accumulate Bitcoin as Bitcoin Price Consolidates

Cryptocurrency fund Grayscale Investments continues to actively increase its Bitcoin holdings in its portfolio, with its Bitcoin management scale exceeding the $10 billion mark.

Grayscale Investments Bitcoin holdings Source: bybt.com

Grayscale has accumulated nearly 13,000 BTC in the past week, holding a total of 547,000 BTC. Therefore, it has been another great week for the Grayscale Bitcoin Trust. The same excitement can be seen by analyzing its premium relative to the effective BTC held per share (currently 0.00095153 BTC).

Grayscale Bitcoin Trust Premium Source: TradingView & Grayscale

As mentioned above, the Grayscale Bitcoin Trust premium increased to 22% from 11% in the previous week. The average premium for this metric over the past 90 days is 14%. Therefore, with the recent 6-month high, this metric reflects positive momentum.

Perpetual Futures Funding Fees Remain Stable

Perpetual contracts (also known as inverse swaps) have an embedded rate, usually charged every eight hours. The funding rate ensures that there is no imbalance in trading risk. Even if the positions of buyers and sellers are always the same, the leverage may vary.

If the perpetual contract price is significantly greater than the spot price at a certain moment, the long position needs to pay the short position. If the perpetual contract price is significantly less than the spot price at a certain moment, the short position needs to pay the long position. This issue is especially important during a bull market, because there is usually more long demand in a bull market.

A rate that remains above 2% on a weekly basis implies extreme optimism. This level is acceptable when the market is rallying, but is problematic if the Bitcoin price is moving sideways or in a downtrend.

In this case, high leverage on the buy side increases the likelihood of large liquidations during unexpected price declines.

BTC perpetual futures funding rate Source: Digital Assets Data

Note that despite Bitcoin’s stagnant price, the weekly funding rate remains at healthy levels. This data suggests that traders remain optimistic, even if they are not overly levered.

There was also a brief moment of excitement in the early hours of December 1 when Bitcoin tested the $19,900 level.

Contango peaked but has since normalized

Funding rates can introduce some distortions as it is the preferred instrument for retail traders and is therefore subject to excessive leverage. Professional traders, on the other hand, tend to dominate long-term futures contracts with set expiration dates.

Traders can judge the degree of bullishness for themselves by measuring how much of a premium futures trade to the general spot market. Futures typically trade at a premium of 0.5% or more to spot prices.

Whenever the premium turns negative, it’s a warning red flag. This situation, also known as backwardation, indicates that the market is turning bearish.

BTC futures premium in January 2021 Source: Digital Assets Data

The above chart shows that this indicator briefly touched 2% on December 1, but then adjusted to 0.9% as Bitcoin failed to break through the $20,000 resistance level. Despite the decline, the premium remains above the minimum threshold of 0.5%, indicating that professional traders are optimistic about it.

Option Put/Call Ratio

By measuring whether more activity is through call (buy) options or put (sell) options, one can gauge overall market sentiment. Generally speaking, call options are used for bullish strategies and put options are used for bearish strategies.

The put-to-call ratio is 0.70, indicating that open puts are 30% less than call options, and can therefore be considered bullish.

In contrast, a put-to-call ratio of 1.20 would indicate that open puts outweigh calls by 20%, which could be considered bearish. One thing to note is that this metric aggregates the entire Bitcoin options market.

BTC options put/call ratio Source: Cryptorank.io

As Bitcoin price approaches $20,000, it is natural for investors to seek downside protection. As a result, the put/call ratio peaked at 0.70 on December 2. Despite the increase, call options still outnumber put options by 30%.

After this period of excitement, the indicator has recovered to a healthy 0.63. Considering that 0.67 is the average for the past 3 months, this should be seen as bullish as fewer investors are buying protective put options.

Bitcoin price trend steady, but investors remain bullish

Overall, each of the key indicators discussed above remain stable within the expected range, especially considering the market’s recent pullback to $18,100.

When Bitcoin remains above $19,000, investors may begin to speculate on the possibility of Bitcoin setting a new all-time high, and some may rush to take profits and exit.

At the moment, none of the indicators are ringing alarm bells. While the lack of altcoin rallies during Bitcoin’s consolidation could dampen investor sentiment, the overall bullish sentiment remains.

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