shorts

Bitcoin price rallies to $19K, but analyst says a $17.3K retest could happen next

Bitcoin price hit a year-to-date high near $19,000 as pro traders used leverage to propel the pump, but derivatives data hints at reasons for BTC price to retest $17,300.

Bitcoin (BTC) price has gained 15% in the past 13 days, and during this timeframe, traders’ bearish bets in BTC futures were liquidated in excess of $530 million compared to bulls.

After rallying to $19,000 on Jan. 12, Bitcoin reached its highest price since the FTX exchange collapse on Nov. 8. The move was largely fueled by the United States Consumer Price Index (CPI) expectation for December, which matched consensus at 6.5% year-over-year — highlighting that the inflationary pressure likely peaked at 9% in June.

Furthermore, on Jan. 11, FTX attorney Andy Dietderich said $5 billion in cash and liquid cryptocurrencies had been recovered — fueling hopes of partial return of customer funds in the future. Speaking to a U.S. bankruptcy judge in Delaware on Jan. 11, Dietderich stated that the company plans to sell $4.6 billion of non-strategic investments.

Let’s look at derivatives metrics to understand whether professional traders are excited about Bitcoin’s rally to $19,000.

Margin use increased as Bitcoin price rallied to $18,300 and above

Margin markets provide insight into how professional traders are positioned, and margin is beneficial to some investors because it allows them to borrow cryptocurrency to leverage their positions.

For instance, one can increase exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only short the cryptocurrency as they bet on its price declining. Unlike futures contracts, the balance between margin longs and shorts isn’t always matched.

*OKX stablecoin/BTC margin lending ratio. Source: OKX*

The above chart shows that OKX traders’ margin lending ratio firmly increased on Jan. 11, signaling that professional traders added leverage longs as Bitcoin rallied toward $18,300.

More importantly, the subsequent 2% correction on Jan. 12 that led Bitcoin to a $17,920 low marked the complete margin reversal, meaning whales and market makers reduced their bullish positions using margin markets.

Presently at 21, the metric favors stablecoin borrowing by a wide margin, indicating that bears are not confident about opening Bitcoin margin shorts.

Futures traders ignored the Bitcoin price pump

The long-to-short metric excludes externalities that might have solely impacted the margin markets. In addition, it gathers data from exchange clients’ positions on the spot, perpetual and quarterly futures contracts, thus offering better information on how professional traders are positioned.

There are occasional methodological discrepancies between different exchanges, so readers should monitor changes instead of absolute figures.

*Exchanges’ top traders Bitcoin long-to-short ratio. Source: Coinglass*

Even though Bitcoin broke above the $18,000 resistance, professional traders have kept their leverage long positions unchanged, according to the long-to-short indicator.

For instance, the ratio for Binance traders stood firm at 1.08 from Jan. 9 until Jan. 12. Meanwhile, top traders at Huobi reduced their leverage longs as the indicator moved from 1.09 to the present 0.91. Lastly, at crypto exchange OKX, the long-to-short slightly increased favoring longs, moving from 0.95 on Jan. 9 to the current 0.97.

Traders using futures contracts were not confident enough to add leveraged bullish positions despite the price increase.

Bitcoin price could retest $17,300

While the margin data shows that sizable leverage was used to push Bitcoin above $18,000, it suggests that the situation was only temporary. Most likely, those professional traders deposited more margin and consequently reduced their leverage after the event. In essence, the metric looks very healthy because it indicates that margin markets are not overbought.

As for the top trader’s long-to-short, the absence of demand for leverage longs using futures contracts is somewhat concerning, but at the same time, it leaves room for additional purchasing power.

From a derivatives standpoint, even if Bitcoin retests $17,300, the bulls should not be concerned because the derivatives indicators show little demand from short sellers and no excessive leverage from buyers.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Bitcoin margin long-to-short ratio at Bitfinex reach the highest level ever

A key Bitcoin price metric hit a new all-time high, but is this a bullish or bearish development?

Sept. 12 will leave a mark that will probably stick for quite a while. Traders at the Bitfinex exchange vastly reduced their leveraged bearish Bitcoin (BTC) bets and the absence of demand for shorts could have been caused by the expectation of cool inflation data.

Bears may have lacked confidence, but August’s U.S. Consumer Price Index (CPI) came in higher than market expectations and they appear to be on the right side. The inflation index, which tracks a broad basket of goods and services, increased 8.3% over the previous year. More importantly, the energy prices component fell 5% in the same period but it was more than offset by increases in food and shelter costs.

Soon after the worse-than-expected macroeconomic data was released, U.S. equity indices took a downturn, with the tech-heavy Nasdaq Composite Index futures sliding 3.6% in 30 minutes. Cryptocurrencies accompanied the worsening mood, and Bitcoin price dropped 5.7% in the same period, erasing gains from the previous 3 days.

Pinpointing the market downturn to a single inflationary metric would be naive. A Bank of America survey with global fund managers had 62% of respondents saying that a recession is likely, which is the highest estimate since May 2020. The research paper collected data on the week of Sept. 8 and was led by strategist Michael Hartnett.

Interestingly, as all of this takes place, Bitcoin margin traders have never been so bullish, according to one metric.

Margin traders flew away from bearish positions

Margin trading allows investors to leverage their positions by borrowing stablecoins and using the proceeds to buy more cryptocurrency. On the other hand, when those traders borrow Bitcoin, they use the coins as collateral for shorts, which means they are betting on a price decrease.

That is why some analysts monitor the total lending amounts of Bitcoin and stablecoins to understand whether investors are leaning bullish or bearish. Interestingly, Bitfinex margin traders entered their highest leverage long/short ratio on Sept. 12.

*Bitfinex margin Bitcoin longs/shorts ratio. Source: TradingView*

Bitfinex margin traders are known for creating position contracts of 20,000 BTC or higher in a very short time, indicating the participation of whales and large arbitrage desks.

As the above chart indicates, on Sept. 12, the number of BTC/USD long margin contracts outpaced shorts by 86 times, at 104,000 BTC. For reference, the last time this indicator flipped above 75, and favored longs, was on Nov. 9, 2021. Unfortunately, for bulls, the result benefited bears as Bitcoin nosedived 18% over the next 10 days.

Derivatives traders were overly excited in November 2021

To understand how bullish or bearish professional traders are positioned, one should analyze the futures basis rate. That indicator is also known as the futures premium, and it measures the difference between futures contracts and the current spot market at regular exchanges.

*Bitcoin 3-month futures basis rate, Nov. 2021. Source: Laevitas.ch*

The 3-month futures typically trade with a 5% to 10% annualized premium, which is deemed an opportunity cost for arbitrage trading. Notice how Bitcoin investors were paying excessive premiums for longs (buys) during the rally in November 2021, the complete opposite of the current situation.

On Sept. 12, the Bitcoin futures contracts were trading at a 1.2% premium versus regular spot markets. Such a sub-2% level has been the norm since Aug. 15, leaving no doubts regarding traders’ lack of leverage buying activity.

Possible causes of the margin lending ratio spike

Something must have caused short-margin traders at Bitfinex to reduce their positions, especially considering that the longs (bulls) remained flat across the 7 days leading to Sept. 12. The first probable cause is liquidations, meaning the sellers had insufficient margin as Bitcoin gained 19% between Sept. 6 and 12.

Other catalysts might have led to an unusual imbalance between longs and shorts. For instance, investors could have shifted the collateral from Bitcoin margin trades to Ethereum, looking for some leverage as the Merge approaches.

Lastly, bears could have decided to momentarily close their margin positions due to the volatility surrounding the U.S. inflation data. Regardless of the rationale behind the move, there is no reason to believe that the market suddenly became extremely optimistic as the futures markets’ premium paints a very different scenario from November 2021.

Bears still have a glass-half-full reading as Bitfinex margin traders have room to add leverage short (sell) positions. Meanwhile, bulls can celebrate the apparent lack of interest in betting on prices below $20,000 from those whales.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

Large Bitcoin liquidations mean one man’s pain is another man’s pleasure — Time to buy the dip?

Pro traders were forced to cut their losses after margin and futures markets became over-leveraged, creating a potential entry point for bullish buyers.

Bitcoin (BTC) has been unable to restore the $24,000 support since Celsius, a popular staking and lending platform, paused withdrawals from its platform on June 13. A growing number of users believe Celsius mismanaged its funds following the collapse of the Anchor Protocol on the Terra (LUNA; now LUNC) ecosystem and rumors of its insolvency continue to circulate.

An even larger issue emerged on June 14 after crypto venture capital firm Three Arrows Capital (3AC) reportedly lost $31.4 million through trading on Bitfinex. Furthermore, 3AC was a known investor in Terra, which experienced a 100% crash in late May.

Unconfirmed reports that 3AC faced liquidations totaling hundreds of millions from multiple positions agitated the market in the early hours of June 15, causing Bitcoin to trade at $20,060, its lowest level since Dec. 15, 2020.

Let’s take a look at current derivatives metrics to understand whether June 15’s bearish trend reflects top traders’ sentiment.

Margin markets deleveraged after a brief spike in longs

Margin trading allows investors to borrow cryptocurrency and leverage their trading position to potentially increase returns. For example, one can buy cryptocurrencies by borrowing Tether (USDT) to enlarge exposure.

On the other hand, Bitcoin borrowers can short the cryptocurrency if they bet on its price decline, and unlike futures contracts, the balance between margin longs and shorts isn‘t always matched. This is why analysts monitor the lending markets to determine whether investors are leaning bullish or bearish.

Interestingly, margin traders boosted their leverage long (bull) position on June 14 to the highest level in two months.

*Bitfinex margin Bitcoin/USD longs/shorts ratio. Source: TradingView*

Bitfinex margin traders are known for creating position contracts of 20,000 BTC or higher in a very short time, indicating the participation of whales and large arbitrage desks.

As the above chart indicates, even on June 14, the number of BTC/USD long margin contracts outpaced shorts by 49 times, at 107,500 BTC. For reference, the last time this indicator stood below 10, favoring longs, was on March 14. The result benefited the counter-traders at that time, as Bitcoin rallied 28% over the following two weeks.

Bitcoin futures data shows pro traders were liquidated

The top traders’ long-to-short net ratio excludes externalities that might have impacted the margin instruments. By analyzing these whale positions on the spot, perpetual and futures contracts, one can better understand whether professional traders are bullish or bearish.

It’s important to note the methodological discrepancies between different exchanges, so the absolute figures have less importance. For example, while Huobi traders have kept their long-to-short ratio relatively unchanged between June 13 and Ju15, professional traders at Binance and OKX reduced their longs.

This movement could represent liquidations, meaning the margin deposit was insufficient to cover their longs. In these cases, the exchange’s automatic deleveraging mechanism takes place by selling the Bitcoin position to reduce the exposure. Either way, the long-to-short ratio is affected and signals a less bullish net position.

Liquidations could represent a buying opportunity

Data from derivatives markets, including margin and futures, show that professional traders were definitely not expecting such a deep and continuous price correction.

Even though there has been a high correlation to the stock market and the S&P 500 index posted a 21.6% year-to-date loss, professional crypto traders were not expecting Bitcoin to drop another 37% in June.

While leverage allows one to maximize gains, it can also force cascading liquidations such as the recent events seen this week. The automated trading systems of exchanges and DeFi platforms sell investors’ positions at whatever price is available when the collateral is insufficient to cover the risk and this put heavy pressure on spot markets.

These liquidations sometimes create a perfect entry point for those savvy and brave enough to counter-trade excessive corrections due to lack of liquidity and the absence of bids on the trading platforms. Whether or not this is the final bottom is something that will be impossible to determine until a few months after this volatility has passed.