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

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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.

Relat­ed: This week’s Ethereum Merge could be the most sig­nif­i­cant shift in crypto’s history

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.



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