How to Use Spot and Derivatives Data to Analyze Bitcoin

As the Bitcoin markets mature, there are now more sophisticated tools that traders need to recognize incoming trends.


Key Takeaways

  • Derivatives have seen an insurgence in liquidity over the last year, giving the instruments an important role in analyzing BTC and ETH price action.
  • Spot markets are still the dominant force, and most trend reversals are preceded by a change in capital inflow to exchanges.
  • The rally between December 2019 and February 2020 was the first derivative-induced price movement.
  • Using data from both markets to draw actionable insights will offer a clearer picture than just looking at either one exclusively.

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Analysts cannot evaluate Bitcoin like a stock, so sentiment plays an essential role in determining price trends. A sure shot way to improve one’s market analysis is to look at both the spot and derivative markets simultaneously. 

The Rise of Crypto Derivatives

Bitcoin’s liquidity is predominantly derived from the spot market. This means most activity related to the cryptocurrency is the exchange of coins on exchanges like Binance or OTC desks like Cumberland.

Crypto derivatives, however, have been one of the leading growth stories of the last two years. In just a year, BTC and ETH derivatives have seen immense growth in liquidity and trading volumes.

A clear cut sign of this is BitMEX, which was previously unchallenged, losing market share to competitors as they battle for derivatives market share.

This growth stems from the arrival of hedge funds and large traders to the crypto market. Derivatives offer an efficient way for traders to increase or limit their exposure to an asset. As a result, derivatives are the preferred instrument of those who trade large sums.

In 2020, Bitcoin options have witnessed vigorous growth. However, the size of the options market is considerably smaller than futures.

Hence, the prime focus of derivatives analysis rests in the futures market. 

This is important because retail…

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