Is A Bitcoin Bubble Forming?
The surge in Bitcoin’s value over the past few weeks has led to discussions about the possibility of a Bitcoin bubble. Analyst Brett Friedman, of Winhall Risk Analytics/OptionMetrics, has examined five factors to consider when determining if a financial bubble is forming.
The first indicator is the growing spread between implied volatility and out-of-the-money to at-the-money volatility skew in options trading. This spread has been increasing but has not yet reached abnormal levels.
Another indicator is the shape of the futures curve. A backwardated curve or a flattened contango curve can indicate bubble-like behavior. However, Bitcoin’s futures curve, which has been in contango since the introduction of futures in late 2017, has recently seen deferred months outperforming nearby contracts. This suggests trader confidence in the sustainability of the rally well into 2025.
Volume and open interest in cryptocurrency markets can also be used to gauge market frothiness. Bitcoin futures have seen increased activity, particularly in the Micro BTC contract favored by retail investors, since the election. This could indicate that traders are comfortable with the risk of deferred contracts and believe that the current rally will be sustained.
The emergence of related financial products with high leverage and promises of rapid returns is another factor that may indicate speculative behavior. Products like the MicroStrategy stock, leveraged Bitcoin-related ETFs, and the proliferation of crypto evangelists on social media have contributed to the enthusiasm in the market.
In conclusion, while there are signs of an enthusiastic market for Bitcoin futures, it is not yet clear if this constitutes a bubble. However, in the short run, Bitcoin will need to demonstrate new bullish fundamentals or return above $100K to reignite speculation that a bubble might be forming.
