This measure went negative last time by 24%+ – will it happen again?

Between October 9 and October 10, Bitcoin fell by 5.3%, reaching a three-week low of $58,900.

The market's correction began after the United States reported better-than-expected consumer inflation data, suggesting traders that the Federal Reserve may not have much incentive to raise interest rates in the near term.

Bitcoin (BTC)'s reaction reflects investors' view that there is an increased possibility of a decline. The US Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 0.2 percent in September from the previous month. In this situation, despite the economic slowdown, which is contrary to the central bank's objective of stimulating growth in controlling inflation, inflation continues.

Meanwhile, US jobless claims rose to a 14-month high, according to data released on October 10. Initial applications for unemployment benefits rose unexpectedly, reaching a seasonally adjusted 258,000 on October 5. Although part of the growth was due to the Boeing strike, the broader negative impact on the economy remains a major concern for policymakers.

While there is no guarantee that the price of Bitcoin will be negatively affected if the US Federal Reserve is forced to adopt a tighter monetary policy, investors fear that a bullish economy could lead to a stock market correction. As a result, trader morale has been dampened, given the high 88% price correlation between the S&P 500 and Bitcoin.

In this context, it is natural to expect Bitcoin traders' optimism about short-term prices to diminish, especially after two consecutive days of withdrawal from US spot Bitcoin ETFs. According to data from Farside Investors, these instruments saw a net inflow of $59 million between October 8 and October 9, reversing the trend of the previous two trading days.

Bitcoin's bearish momentum accelerated after market maker Cumberland DRW reported that it was being sued by the US Securities and Exchange Commission for being an “unregistered dealer” in cryptocurrency trading. According to the regulator's statement, the Chicago-based company made profits from the sale of crypto assets “similar to the sale of commodities”.

Bitcoin derivatives reflect short-term selling pressure

Even if those claims hold up in court, traders will seek protection amid fear and uncertainty. As Bitcoin fell below $59,000, the major derivatives indicators showed weakness, suggesting that demand for a profit-buying (long) move has waned.

Bitcoin futures premiums, which measure the difference between monthly contracts and standard exchange rates in independent markets, should reflect a 5%-10% annual premium (basis) to compensate for longer settlement periods.

On October 10, Bitcoin's base rate dropped below the 5% neutral threshold for the first time in over two months. After all, when this indicator reversed, on August 5, Bitcoin fell 24.6% in three days. Therefore, the recent change in BTC futures parameters indicates a significant change in traders' sentiments.

Traders should analyze the options market to understand the impact of recent Bitcoin price movements. A 25% delta skew shows arbitrage desks and market makers overpaying for upside or downside protection. If traders are anticipating a Bitcoin price drop, the bias will tend to increase by more than 7%. On the contrary, during the happy period, it tends to be negative by 7%.

Related: Breakthroughs in Binance and other major crypto exchanges confound experts

Bitcoin options' 25% skew remains near zero, indicating that whales and market makers have not changed their short-term risk-reward view. Therefore, the sharp decline in BTC is likely to be temporary, suggesting that a handful of large entities may have inadvertently closed their long positions. In the end, derivatives traders aren't betting on Bitcoin's recent price drop.

This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.