Crypto Risk Management Remains Paramount in Coming Weeks

Funding rates have turned positive for bitcoin in an early, albeit hopeful sign that market sentiment is shifting positive. As an analyst, it would be improper, and even irresponsible to suggest that this marks anything remotely close to a bottom.

The starting point for investment decisions should center on risk management…and then risk management again. Institutional investors’ actions embody this strategy as many have remained on the sidelines during recent weeks' turmoil.

The looming uncertainty that other crypto entities will soon be in distress, only adds to the motivation to wait. As some groups must liquidate BTC and ETH, the cost basis for both will only improve.

What is arguably the worst event in crypto market history, the collapse of crypto exchange giant FTX, may become a building block for crypto firms to succeed in the future, a sizable chorus is saying.

But that event remains far off. In the interim, data will remain paramount as crypto markets wade through FTX contagion. Some data will reinforce trends but other information may counter them.

The positive funding rate reflects increased demand for long positions, indicating improved investor sentiment.

However, this trend should be viewed in the context of eight prior days of negative funding, and bears watching, as the sharp decline on Nov. 9 may represent an overshoot to the downside.

The foundation for a potential short squeeze will have been laid, if this plays out.

Yet funding rates for ETH remain negative. This is worth watching, given BTC and ETH’s strong correlation. BTC and ETH prices generally move in tandem, so any distinction between the two is noteworthy.

The three-month rolling basis for BTC has moved into positive territory, a potential bullish sign. Three-month basis highlights the yield that can be earned by buying an asset in the spot market, and selling it in the futures market. Still, the 0.307% spread leaves little to be desired.

The three-month basis being previously negative implies bearish sentiment and may continue, which should be concerning for investors. . There’s certainly no guarantee that this will not continue. The primary message is the directional change.

Basis for ETH has also moved into positive territory, with a healthier 5.4% spread between spot and futures markets.

A look at options open interest by strike price shows increased put buying at the $16,000 strike price and lower. For ETH a spike in put option buying is building at the $1,100 strike price. As a put option represents the right but not the obligation to sell an asset, the activity at lower strike prices is to be understood.

As confidence builds we should see less downside protection at lower levels. When that occurs remains questionable, as it should be.