Maybe Bitcoin didn’t bottom? SEC lawsuit against Binance shakes BTC bulls’ confidence

Bitcoin’s price declined 5% in one hour on June 5 after the United States Securities and Exchange Commission (SEC) filed a lawsuit against Binance on allegations of violating federal securities laws. Even though the $25,500 support held for Bitcoin, investors are still digesting the potential impacts of the regulatory action, which also involves Binance CEO Changpeng “CZ” Zhao.

According to digital asset investment firm Arca CEO Jeff Dorman, the direct impact of an eventual shutdown of Binance operations in the U.S. is irrelevant. Furthermore, non-criminal charges from the past should not destabilize Binance’s present international structures. Still, Arca’s CEO expects negative market sentiment to prevail as the crypto community cheers for CZ and Binance.

My 2 sats on SEC vs Binance

Mostly irrelevant since no one operates in the US anymore and a bunch of non-criminal charges for past wrongdoings don’t really matter.

I see 2 actual negatives from this: ⬇️

— Jeff Dorman, CFA (@jdorman81) June 5, 2023

Binance is not the only pressing concern

Even if the SEC charges against Binance have little to no impact in the medium term, there’s additional uncertainty coming from Digital Currency Group (DCG) and its subsidiary Genesis Capital, which filed for Chapter 11 bankruptcy on Jan. 19.

looks like a dcg portco
-manages ~3b of silbert’s personal holdings
-lent genesis 1b
-pulled 1b coincident w/ 3ac default / dcg note
-has ~ no clients other than barry

its v clear nobody else reads these filings carefully

the stonewalling makes sense!https://t.co/7NgFnUkmp1

— Data Finnovation (@DataFinnovation) June 4, 2023

According to Jon Reiter, CEO of Data Finnovation and ChainArgos, DCG CEO Barry Silbert pulled $1 billion out of his personal holdings just as cryptocurrency hedge fund Three Arrows Capital defaulted. While this could have been a coincidence, it certainly draws even more attention to the intercompany loans and deals inside DCG.

Traders now question whether Bitcoin (BTC) will test the $25,000 resistance, a level unseen since March 17. Considering that the U.S. debt ceiling crisis has been averted, the odds for a surprise Bitcoin price rally seem even more unlikely in the short term.

Investors should be especially attentive if Bitcoin futures contract premiums flip negative or if increased costs for hedging using BTC options occur.

Bitcoin derivatives markets show a mixed reaction

Bitcoin quarterly futures are popular among whales and arbitrage desks. However, these fixed-month contracts typically trade at a slight premium to spot markets, indicating that sellers are asking for more money to delay settlement.

As a result, BTC futures contracts in healthy markets should trade at a 5 to 10% annualized premium — a situation known as contango, which is not unique to crypto markets.

Bitcoin traders have been rather cautious since June 1, as the futures premium remained below 4%. On the other hand, the indicator stood at 3.5% after the SEC charges against Binance came to light on June 5.

Traders should also analyze options markets to understand whether the recent correction has caused investors to become more optimistic. The 25% delta skew is a telling sign of when arbitrage desks and market makers overcharge for upside or downside protection.

In short, if traders anticipate a Bitcoin price drop, the skew metric will rise above 7%, and phases of excitement tend to have a negative 7% skew.

Related: Fines and regulation, The ever-growing landscape of crypto compliance

As displayed above, according to the BTC options 25% delta skew, traders suddenly flipped bearish, as the indicator spiked to 11% on June 5. This level was the highest in three months and signals discomfort from professional traders.

The bear trend continues while FUD prevails

In essence, Bitcoin options and futures markets suggest that the bear trend that started after the failed $31,000 test on April 14 continues, although there has been no significant fallout in the overall market structure. Yet, it might be too early to interpret the potential consequences of the SEC’s actions, and court rulings take months — if not years — to settle.

Consequently, those betting on a Bitcoin bull run should adjust their expectations because investors hate uncertainty.

Until there is more clarity on the DCG-Genesis situation and Binance’s operational capability amid the tougher U.S. regulatory environment, there is less incentive for long-term buyers to step in and defend the all-important $25,000 support.