The crypto derivatives market is cautiously regaining stability after October’s deleveraging event: Bybit Report

While the crypto derivatives market shows signs of stabilizing after October’s liquidation, Bitcoin’s fall below $99,000 suggests traders remain cautious and the recovery is fragile.

It’s been almost a month since the crypto market experienced one of the largest liquidation events in history, but the fallout from that incident still lingers.

This is evident from a joint crypto derivatives report by the crypto exchange Bybit and the investment research institute Block Scholes revealed that traders are cautiously finding stability. This defensive posture has spread across the derivatives market, impacting both crypto options and perpetual contracts.

Consequences of liquidation event linger

Bybit found that notional open interest in perpetual contracts has remained below $10 billion since the mass liquidation. Recall that renewed trade tensions between the United States and China prompted the market-wide decline. Bybit stated that the event had a significant impact on the perpetual swap markets, and traders are now showing little appetite to re-enter their previously lost positions.

The US and Chinese governments have made some diplomatic progress following the incident. However, Fed Chairman Jerome Powell’s hawkish tone at the next FOMC meeting supported bearish sentiment. Traders showed more risk-off reactions as Bitcoin (BTC) plummeted to $107,000, and short-term put-call skews tilted sharply bearish.

Currently, Bitcoin and Ether (ETH) volatility differentials in the options market have now returned to a downward bias after briefly favoring calls. The term structures for both assets have normalized, but market volatility is still high. This indicates a continued demand for optionality, even though the current environment has historically been known for low volatility.

Traders are taking a defensive stance

While open interest in the futures market remains flat, that of the options sector has steadily increased. Bitcoin’s open interest still accounts for about half, while the remaining spread is spread across eight tracked altcoins. While current market conditions reflect a lack of momentum and the decoupling of cryptocurrencies from broader risk sentiment, open interest levels reflect those prior to the liquidation.

Furthermore, options open interest reflects a defensive stance and consistent demand from traders for short-term positions. Market participants also hedge through options.

You might also like:

“Traders have shown a willingness to ramp up short-term volatility during stress events, briefly inverting the curve. While the inversion was short-lived, it left a higher baseline in volatility prices, especially concentrated in put options,” Bybit and Block Scholes explained.

Meanwhile, Bybit stated that BTC is limited to the $105,000-$115,000 range. The asset fell below the range to $99,000 on Tuesday. BTC was trading just above $101,800 at the time of writing, according to data from CoinMarketCap.