Analysis of the crypto derivatives market using the Dcrypt platform
In an effort to arm investors with more insights into the crypto derivatives market, Dcrypt has released a set of analytical tools to assist investors when trading the XBTUSD perpetual swap on BitMEX.
With the Dcrypt futures analytics you can:
- Understand the markets reaction to a current price level with open interest.
- Determine price support and resistance using volume profile.
- Prepare for future price swings using volatility.
- Analyze liquidity and sentiment with buy sell volume
To best communicate the value of the Dcrypt analytics suite, we will explore the recent XBTUSD price movement on November 9th. It is worth noting that there may be alternative ways to interpret this data, and none of the following should be taken as investment advice.
Determining Levels of Support and Resistance
Volume profile is the measure of trading activity (volume) at specific price levels. When looking at this measure, you are attempting to spot when price movements are not being consistent with volume flows. For example, if the price moves down to a previous support, and the volume profile indicator shows that 70% of the volume happened at the higher price level, then an inference can be made that the price movement down may not have been justified.
Recently BTC took a quick hit on November 8th establishing new price support around 6420. Looking at November 8th’s data, it is obvious that most of the trading activity happens on the lower end of the session, hovering around the 6420–6440 level. While the asset traded around 6480 previously, it was apparent that activity was not strong enough to keep it supported at that level.
This trend continues to November 9th where you can see the price taking a large dip. During the day’s session most of the trading activity occurred at the $6350 level, indicating further confidence in lower prices.
Does the Crowd Agree?
Open interest is the number of positions (contracts) open at any given time. It is important to note that open interest is measuring the desired activity of the given asset at a price level. A bull signal is when price is trending upwards with an increase in open interest. A bear signals is when price is trending down and open interest is increasing.
Looking at open interest gives us a good idea of how confident the market is in the new price level. While it was apparent on the volume/session profile that the market is trading down, open interest is further increasing, showing a greater interest in the new (lower) price level. Notice here how open interest takes a significant dip and then continues to trend upward. This coincides with the price dip shown before. The decrease shows both the traders being stopped out due to liquidations, in addition to profitable traders taking gains off the table. The increase in open interest afterwards furthers the sentiment that the market agrees in lower prices in the future.
Understanding liquidity’s effect on prices
Buy and sell volume is the measure of the amount of trades that have crossed the market. Buy volume increases when a buy crosses the market and lifts the sellers offer. Sell volume increases when a seller of an asset crosses the market to hit the bid. Analyzing buy/sell volume is done to determine the given level of interest of an asset over a specific time period. When analyzing buy sell volume, it is important to look for deviations away from avg vol, that way it is easier to determine changes in the trend.
Here we can see an overall increase in sell volume with decreasing average volume. This indicates a thinner market on the downturn, normally signifying that the price may have fallen too far. Perhaps the downturn in price isn’t as justified as we may have thought.
Volatility’s impact on expected returns
Volatility is a measure of the difference in returns over the mean. This measure helps traders understand the potential magnitude of future price movements by analyzing historical price movements. This measure is often used when analyzing open option positions and determining whether or not it is more profitable to close out the current position or to hold for a different price level (which is determined through historical volatility)
Since trading activity is favoring cheaper prices, but slippage appears to be something to worry about, I figure I should analyze recent volatility to determine the right move. BTC volatility has obviously decreased over the past couple of weeks, so maybe the price doesn’t have a chance to move that much further that quickly (meaning it wont turn back upwards that soon).
Putting it together
I know that BitMex is currently paying the shorts on the BTC/USD perpetual swap (meaning they are contrarian) and I know that volatility is lower than it has been historically. Combining this with the data above, it would make the most sense to stake up a sizable short position at a comfortable entry (30–50bps above strike), place protective stop losses, and collect the funding fee over time. Since vol is low and the market favors lower prices, it would be silly to pay the fee and be hoping for more vol than is expected. If a trader wanted to be long, something they would want to know is the expected chance of the asset moving to the desired level before the funding fee hits. This way you know with a certain probability what the chances are you your trade being profitable. While no tool like that currently exists, Dcrypt is proud to announce it will be live on the platform in the coming weeks.
If you are a crypto trader looking for advanced tools to gain an edge, or have any questions about the Dcrypt platform, please don’t hesitate to reach out to me directly at jack.trunz@dcrypt.io
