September 12 will leave a mark that will probably last for quite some time. Traders on the Bitfinex exchange sharply reduced their leveraged bearish Bitcoin (BTC) bets, and the lack of demand for shorts may have stemmed from expectations of cool inflation data.
Bears may have lacked confidence, but August’s US Consumer Price Index (CPI) was higher than market expectations and they appear to be on the right side. The inflation index, which follows a broad basket of goods and services, rose by 8.3% from the previous year. More importantly, the energy price component fell by 5% over the same period, but this was more than offset by increases in food and housing costs.
Soon after the release of worse-than-expected macroeconomic data, US stock indexes tumbled, with the tech-heavy Nasdaq Composite down 3.6% in 30 minutes. Cryptocurrencies followed the deteriorating sentiment, with Bitcoin prices down 5.7% over the same period, erasing gains from the previous 3 days.
It would be naïve to point the market’s downturn to a single measure of inflation. A Bank of America survey of global fund managers said 62% of respondents said a recession was likely, the highest estimate since May 2020. The research paper collected data for the week of September 8 and was led by strategist Michael Hartnett.
Interestingly, with all of this happening, Bitcoin margin traders have never been so bullish, by one measure.
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 these traders borrow Bitcoin, they are using the coins as collateral for shorts, meaning they are betting on a drop in price.
That’s why some analysts monitor the total lending volumes of Bitcoin and stablecoins to understand whether investors are leaning bullish or bearish. Interestingly, Bitfinex margin traders entered their highest long/short leverage ratio on September 12th.
Bitfinex margin traders are known to create position contracts of 20,000 BTC or higher in a very short time, indicating the involvement of whales and large arbitrage bureaus.
As the graph above indicates, on September 12, the number of BTC/USD long margin contracts exceeded short contracts by 86 times, at 104,000 BTC. For reference, the last time this indicator crossed 75, supporting desires, was on November 9, 2021. Unfortunately, for bulls, the result benefited bears as Bitcoin gained 18% over the next 10 days.
Derivatives traders were too excited in November 2021
To understand how bullish or bearish professionals are positioned, one should analyze the underlying futures. That indicator is also known as futures spread and it measures the difference between futures contracts and the current spot market on regular exchanges.
3-month futures typically trade at a premium of 5% to 10% per year, which is considered the opportunity cost of arbitrage trading. Notice how Bitcoin investors were paying exorbitant premiums for loans (purchases) during the November 2021 meeting, the complete opposite of the current situation.
On September 12, Bitcoin futures were trading at a 1.2% premium to regular spot markets. Such a below 2% level has been the norm since August 15th, leaving no doubt about traders’ lack of leverage activity.
Connected: This week’s Ethereum merger may be the most significant change in crypto history
Possible causes of the increase in the margin ratio
Something must have caused short margin traders at Bitfinex to reduce their positions, especially considering that longs (bulls) remained flat for the entire 7 days leading up to September 12th. The first likely cause is liquidation, meaning sellers had insufficient margins as Bitcoin rose 19% between September 6th and 12th.
Other incentives may have led to the unusual imbalance between longs and shorts. For example, investors may have moved the insurance from Bitcoin margin trading to Ethereum, looking for some leverage as the merger approaches.
Finally, bears may have decided to close their margin positions temporarily due to volatility around US inflation data. Regardless of the argument, there is no reason to believe that the market has suddenly become very optimistic, as futures premiums paint a very different scenario from November 2021.
Bears still have a glass half full as Bitfinex margin traders have room to add to short leveraged (sell) positions. Meanwhile, bulls can celebrate the apparent reluctance to bet on prices below $20,000 from these whales.
The views and opinions expressed here are theirs alone author and do not necessarily reflect the views of Cointelegraph. Every investment and business involves risk. You should conduct your own research when making a decision.
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