Bitcoin's Dip Signals: Reasons for a Bullish Turn

In recent days, the Bitcoin price has dropped by up to 30%, turning investors' eyes to the markets. The fact that Bitcoin futures have fallen below spot prices indicates that fear and panic are at their peak. This situation presents a picture that historically points to periods marking the bottom of Bitcoin prices.

The re-emergence of the backwardation structure in derivative markets is noteworthy. This occurs during periods when futures are below the spot price and generally reflects stress, forced risk reduction, or panic selling. According to Glassnode data, the annualized basis rate for three-month futures has now dropped to around 4%. This rate represents the annual return from a three-month sale strategy after making a spot purchase, and it typically rises during bull markets.

Thomas Young, managing partner of RUMJog Enterprises, indicates that the backwardation structure often signals a turning point. According to Young, this situation brings along two scenarios: The first scenario is a strong recovery after the panic subsides. The second scenario is the establishment of the lowest price level after a final wave of selling.

Looking back at previous backwardation structures, it is noteworthy that Bitcoin dropped to around $15,000 following the FTX collapse in November 2022 and dipped below $20,000 during the SVB crisis in March 2023. Significant price increases have been observed after each of these fluctuations. In August 2023, a turning point occurred at the $25,000 level following uncertainty surrounding ETFs.

The current collapse of the basis rate indicates that the demand for leveraged long positions has weakened. This shows that the market is reassessing its risk appetite after the drop. Under normal circumstances, Bitcoin futures typically trade at a slight premium, while the current structure can be viewed as an indication that the market is still in a process of digestion.