Last nights rally (shown above), which propelled Bitcoin from $30k to over $34k was driven by spot buying, not derivatives. This is important as it signals that the accumulation phase of the market may well be over & we are now entering the initial stages of a bull market, climbing the “wall of worry” of higher interest rates and a potential “risk off” trading environment.

Before delving into the data that demonstrates why we believe the rally to have been spot led, it is important to put the move into context. The prevailing narrative is that options market makers were short covering due to their being short gamma. (This refers to a situation where market makers have sold call options at higher strike prices and, as the price of Bitcoin rises (meaning the delta of those options rise) they become increasingly short and need to hedge.) As most market makers delta hedge in the derivatives market, one would reasonably expect the premiums to rise, if that were the case. They did not…

There are three major derivatives markets for trading Bitcoin delta: CME futures, which is the only market that US based traders can use, Inverse perpetual swaps which trade on multiple foreign exchanges, including Deribit (the largest options exchange) and the market volume leader, the Bitcoin-USDT perpetual swap. None of these markets showed significant premiums to spot bitcoin during the rally, even when the price appreciation triggered hundreds of millions of dollars of short positions being liquidated. CME FUTURES

The above chart, which used the CoinRoutes spread algorithm data, lines up with the BTC spot chart from the top of the article. It is noteworthy that the initial move in the futures spread was negative, meaning spot moved before the futures moved, then as the first candle reverted downwards, the premium went briefly positive. Next as the more sustained part of the rally ensued, the premium was in a very tight range and was barely positive.

Inverse Perpetual Swaps

The inverse perpetual swap market experienced a similar pattern, insofar as the first move was negative. The premium did expand to $80 (which translates into a premium of 0.23%) but that seems to have occurred during the liquidation (forced buying) of short positions. Once that was done, the premiums traded in a very tight range for the rest of the rally. Both the low magnitude of the premium, (which is 1/10th the size of the discount seen during the summer drop from 29k to 26k that was clearly derivatives led) and the low volatility in the spread are strongly indicative this was a spot led rally.