After Bitcoin (BTC), the price flirted with a record high of $ 42,000 on Jan. 8, it stabilized within a range between $ 39,000 and $ 41,500 for two days, and the shorter-term pennant structure hinted that a breakout of up to $ 45,000 was a possibility.
This all changed quite suddenly on January 10, as the USD 39,000 support failed to hold and Bitcoin price entered a steep correction.
A whirlwind and brutal 26.6% drop brought BTC back to $ 30,100 in the next 30 hours and $ 1.5 billion in tiered liquidations on derivatives exchanges amplified the correction. Interestingly, this happened just as interest outstanding on BTC futures hit a record high of $ 12.7 billion.
Today’s price action presents a tale of doom, gloom, and liquidations, but what it doesn’t mention is that the Bitcoin price crashed by 20.4% just a week ago when it tested levels below USD 28,000.
During that similar price event, a total of $ 1.2 billion in long contracts were liquidated, so today’s price action isn’t that different from what the market experienced a week ago on Jan. 11.
As the chart above shows, an hour after falling below the USD 28,000 level, BTC bounced back 11%. What may have surprised traders this time around is the 13% bounce from $ 32,200 to $ 36,400, creating a false bottom.
To understand if that is the case, one has to analyze the long-to-short ratio of crypto exchanges and the hourly liquidations.
OKEx top traders bought the top
Data provided by the exchange highlights the net long-to-short positioning of traders. By analyzing each client’s position on the spot, perpetual contracts and futures contracts, one can get a clearer picture of whether professional traders are leaning bullish or bearish.
With this said, there are occasional discrepancies in the methodologies between different exchanges, so viewers should track changes rather than absolute numbers.
Binance’s top traders had an average position of 23% favoring longs for the past 30 days. This was not the case on Jan. 7, when they started adding long positions until they hit a peak of 59% in the early hours of Jan. 10.
This move happened as BTC broke the USD 37,000 resistance and moved its way towards USD 41,500. That’s why Binance top traders have usually responded after each BTC price move rather than anticipating it.
On the other hand, top traders at Huobi had an average long-to-short ratio of 0.91 over the past 30 days, favoring the net shorts by 9%. From January 8 to the early hours of January 10, these traders had raised their shorts, hence profit was taken as BTC failed to break the USD 42,000 level.
This trend reversed when BTC lost the USD 39,000 support and Huobi’s top traders cut their net short position from 28% to 4% in an attempt to bottom out.
Finally, OKEx top traders have added long positions, moving the indicator from 1.00 (flat) in the early hours of January 8 to a 1.79 ratio in favor of long positions in the early hours of 11 January.
These traders bought the top and were the ones to be heavily liquidated when the BTC price crashed 26%. Their long to short ratio hit 1.00 (flat) again, just as BTC hit $ 34,000 on Jan. 11.
Bitfinex traders were also taken by surprise
Bitfinex collects weekly data on the profit and loss of top traders, although it is possible for users to opt out of this ranking. In the past 24 hours, the bottom 10 lost a total of $ 153.3 million.
Relevant losses during a surprise crash shouldn’t mean that Bitfinex traders were completely wrong. Some traders may have been poorly positioned, but they generally made a profit during the rally. As of now, Bitfinex traders are back to a ‘neutral’ position according to the historical levels.
Data provided from exchanges shows that Bitfinex’s long-to-short ratio has increased from 2 to 9, favoring longs between November 25 and December 21.
To put things in perspective, the six-month moving average stands at six, tending toward longs. Thus, given the leverage data of margin products, these traders were surprisingly profitable.
20% of accidents are the rule rather than the exception
It is also important to consider that Bitcoin has a daily average volatility of 3.75%. Therefore, these major corrections are to be expected.
Bitcoin stood for one 50% intraday drop on March 12, 2020, but for those patient enough to sustain those bearish periods, an 11x rally ensued as the cryptocurrency soared from $ 3,600 to nearly $ 42,000.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the view of Cointelegraph. Every investment and trade move carries risks. You should do your own research when making a decision.