September 12 will leave a mark that is likely to last. Traders on Bitfinex reduced bitcoin significantly with bearish influence Interest rates and lack of demand for short positions may be associated with the expectation of moderate inflation data.
The bears may have lacked confidence, but the US consumer price index (CPI) for August came in above market expectations and they appear to be on the right side. The inflation index, which measures a broad basket of goods and services, rose 8.3% from the previous year. 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.
Shortly after the release of macroeconomic data, which turned out to be worse than expected, US stocks suffered: heavy futures for the Nasdaq Composite index fell 3.6% in 30 minutes. Cryptocurrencies were accompanied by a drop in sentiment, with the price of bitcoin falling 5.7% over the same period, erasing the gains of the previous three days.
It would be naive to limit the market’s fall to one inflation indicator. A Bank of America survey of global fund managers found that 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 moderated by strategist Michael Hartnett.
Interestingly, since all this happened, bitcoin margin traders have never been bullish, according to one indicator.
Margin traders avoid bearish positions
Margin trading 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 bitcoins, they are using the coins as collateral for short trades, which means they are betting that the price will go down.
For this reason, some analysts monitor the total amount of Bitcoin and stablecoin lending to see if investors are up or down. Interestingly, on September 12, Bitfinex margin traders reached their highest leverage long/short ratio.
Bitfinex Margin The ratio between buying/selling positions in bitcoins. Source: TradingView
Bitfinex margin traders have been known to generate contracts for trades of 20,000 BTC or higher in a very short time, indicating the involvement of whales and large arbitrage tables.
As you can see from the chart above, on September 12, the number of BTC/USD long margin contracts was 86 times higher, at 104,000 BTC. For reference, the last time this indicator rose above 75 in favor of long positions was on November 9, 2021. Unfortunately for the bulls, the result benefited the bears as bitcoin fell 18% over the next 10 days.
Derivatives traders were very excited in November 2021
To understand whether professional traders are bullish or bearish, it is necessary to analyze the underlying price of a futures contract. This index, also known as the futures premium, measures the difference between futures contracts and the current spot market on conventional exchanges.
Base price of a 3-month Bitcoin futures contract, November 2021. Source: Laevitas.ch
A three-month futures contract typically trades at an annual premium of between 5% and 10%, which is the opportunity cost of arbitrage trading. Note how bitcoin investors overpaid for long trades (buys) during the November 2021 rally, which is the exact opposite of today’s situation.
On September 12, Bitcoin futures traded at a 1.2% premium over regular spot markets. This sub-2% level has been the norm since August 15 and leaves no doubt about the lack of activity among traders to buy leverage.
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Possible reasons for higher lending margins
Something must have caused the short margin traders on Bitfinex to reduce their positions, especially since the buyers (bulls) remained steady in the seven days until September 12th. From September 6 to September 12, it rose by 19%.
Other triggers can cause an unusual imbalance between long and short long positions. For example, as consolidation approaches, investors may switch security from Bitcoin margin trading to Ethereum, looking for some form of leverage.
Finally, the bears may have decided to temporarily close their margin positions due to the volatility of the US inflation data. Regardless of the reasons for this move, there is no reason to believe that the market has suddenly become overly optimistic as the premium futures markets paint a very different scenario to November 2021.