September 12 will leave a mark that is likely to remain for a long time. Traders on Bitfinex have significantly lowered their bearish leveraged bets (BTC) and the lack of demand for short positions could have been due to the expectation of moderate inflation data.
Bears may lack confidence, but the US Consumer Price Index (CPI) for August came in above market expectations and they seem to be on the right side. The inflation index, which measures a broad basket of goods and services, increased by 8.3% compared to the previous year. Importantly, the energy price component decreased by 5% in the same period, but was more than offset by increases in food and shelter costs.
Shortly after the release of worse-than-expected macroeconomic data, US stock indexes were hit, with the heavy Nasdaq Composite Index futures dropping 3.6% in 30 minutes. Cryptocurrencies accompanied the deteriorating mood, with the price of Bitcoin dropping 5.7% in the same period, erasing the gains from the previous three days.
To limit the market’s decline to a single inflationary metric would be naive. A survey conducted by Bank of America with global fund managers included 62% of respondents say That a recession is likely, the highest estimate since May 2020. The research paper collected data in the week of September 8 led by strategist Michael Hartnett.
Interestingly enough, since all of this has happened, Bitcoin margin traders have never been bullish, according to one metric.
Margin traders stay away from bearish positions
Trading on margin allows investors to capitalize on their positions by borrowing stablecoins and using the proceeds to buy more cryptocurrencies. On the other hand, when these traders borrow Bitcoin, they are using the coins as collateral for the short trades, which means that they are betting on the price going down.
This is the reason why some analysts are watching the total amount of Bitcoin lending and stablecoins to understand whether investors are inclined to the upside or downside. Interestingly, Bitfinex margin traders entered the highest leverage long/short ratio on September 12th.
Bitfinex margin traders are known to generate deal 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 September 12th, BTC/USD long margin contracts were outnumbered by 86 times, at 104,000 BTC. For reference, the last time this indicator flipped above 75, favoring longs, was on November 9, 2021. Unfortunately, for the bulls, the result benefited from the bears as Bitcoin fell by 18% over the next 10 days.
Derivatives traders were very excited in November 2021
To understand how the bullish or bearish professional traders position, one must analyze the underlying price of the futures contract. Also known as the futures premium, this index measures the difference between futures contracts and the current spot market on regular exchanges.
The 3-month futures contract is usually traded at an annual premium of 5% to 10%, which is an opportunity cost for arbitrage trading. Notice how Bitcoin investors were overpaying for long (buy) trades during the rally in November 2021, which is the exact opposite of the current situation.
On September 12, bitcoin futures traded at a premium of 1.2% against regular spot markets. That level below 2% has been the norm since August 15, and it leaves no doubts about traders’ lack of leverage buying activity.
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Possible reasons for higher margin lending
Something must have caused the short margin traders on Bitfinex to cut their positions, especially given that the buyers (bulls) held steady during the seven days leading up to September 12th. It gained 19% between September 6 and 12.
Other triggers may have led to an unusual imbalance between long and short long positions. For example, investors could switch collateral from margin trades in Bitcoin to Ethereum, looking for some leverage as the consolidation approached.
Finally, the bears could have decided to close their margin positions temporarily due to the volatility surrounding the US inflation data. Regardless of the rationale behind the move, there is no reason to believe that the market has suddenly become too optimistic as the futures markets premium paint a very different scenario than November 2021.
Bears still have a half full reading as Bitfinex margin traders have room to add leverage (sell) positions. Meanwhile, bulls can celebrate the apparent lack of interest in betting the sub-$20,000 prices of those whales.
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