Bottom Fishing in Bitcoin? Here Are the Key Signs To Watch for

Savvy traders are looking for signs of capitulation in the spot and perpetual futures market, and renewed demand for calls when calling market bottom and trend reversal higher.

AccessTimeIconJan 23, 2024 at 8:01 a.m. UTC
  • Savvy traders are looking for a surge in spot and perpetual futures volume and negative funding rates when identifying capitulation and price bottom.
  • The bitcoin market shows no such signs, with the option market reflecting persistent fears of an extended downside move.

Bitcoin (BTC) has declined by 18% to $40,000 since spot ETFs began trading in the U.S. on Jan. 11.

Traders looking for clues on the eventual bottom or the lowest price marking a renewed bullish trend change may want to scan the market for signs of actual and emotional capitulation and positioning in the options market.

Actual capitulation

Capitulation means surrender. In financial markets, it is a point where traders throw in the towel, liquidating their bullish bets in both spot and perpetual futures markets, leading to a dramatic surge in volumes in a falling market.

The mass unwinding of bullish perpetual futures leads to a negative basis identified by sub-zero funding rates. Negative basis or funding rates represent a situation where perpetuals trade at a discount to the underlying asset’s price, indicating seller dominance.

The exit of short-term traders typically represents peak bearishness and paves the way for a market bottom and a renewed move higher.

“For me to be convinced that we reached the local bottom, I would want to see high volume prints with a negative perps basis,” pseudonymous trader ByzantineGeneral said in a post on X.

Volumes have picked up but not so much as to suggest capitulation. (TradingView, volume indicators by Byzantine General)
Volumes have picked up but not so much as to suggest capitulation. (TradingView, volume indicators by Byzantine General) ((TradingView, volume indicators by Byzantine General))

At press time, the bitcoin market showed no signs of surrender. Data from the charting platform TradingView shows that while trading volumes in bitcoin perpetual and spot markets have picked up, they remain well below recent highs.

Meanwhile, per Coinglass, funding rates remain positive, representing the leverage is still skewed on the bullish side.

The global funding rate remains positive, indicating the leverage is still skewed on the bullish side. (Coinglass).
The global funding rate remains positive, indicating the leverage is still skewed on the bullish side. (Coinglass). (Coinglass)

Emotional capitulation

Market bottoms usually involve extreme fear of holding assets and an increased preference for cash.

Savvy traders prefer to buy when sentiment indicators like Alternative.me’s Crypto Fear & Greed index signal extreme fear and scale back exposure when the index signals greed. As the old saying goes, “It is wise to be fearful when others are greedy and to be greedy when others are fearful.”

The current market sentiment is neutral, with the index hovering at 50, down from the above-75 readings early this month, which reflected greed.

A reading below 20 indicates extreme fear and has mostly coincided with peak selling in the past.

Readings below 20 indicate extreme fear (Alternative.me)
Readings below 20 indicate extreme fear (Alternative.me) (Alternative.me)

Options market positioning

Changes in how options are priced have been reliable indicators of trend exhaustion and trend changes in the past.

Options are derivative contracts that give the purchaser the right to buy or sell the underlying asset at a predetermined price at a later date. A call conveys the right to buy and allows the purchaser to profit from or hedge against price rallies, while a put does otherwise.

The seven- and 30-day call-put skews, measuring the pricing for calls relative to puts, dropped below zero a couple of days before ETFs went live, hinting at post-launch price correction.

The key metrics remained negative at press time, indicating fears of a continued price slide. The 60-day gauge signaled a neutral market sentiment.

Negative readings indicate persistent fears of a deeper price slide. (Amberdata)
Negative readings indicate persistent fears of a deeper price slide. (Amberdata) (Amberdata)

Edited by Parikshit Mishra.

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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.


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