In the last 24 hours, Bitcoin (BTC) declined 14% and tested the USD 32,000 support for the fifth time this year. Traders were probably even more concerned when the price fell to USD 31,050, but at the time of writing, the 4-hour chart suggests sales could slow.
Currently, the short-term charts indicate that Bitcoin is still flirting with bearish territory, but a number of derivatives indicators and top traders’ flow are reflecting neutral to bullish levels.
The last three times the Bitcoin price fell below $ 32,000, an extensive rally of up to 30% followed. Data shows that the top traders at OKEx have bought the dip heavily and that the futures premium has remained in an optimistic range.
Although traders are buying this current dip, the sharp drop of USD 4,200 has seriously hurt some investors. The drop to $ 31,270 was followed by $ 460 million in derivatives liquidations. Interestingly, this happened just as interest outstanding on BTC futures hit a record high of $ 13.1 billion.
Today’s price action may seem troubling, but it pales in comparison to the January 10 crash of 24% that wiped out $ 1.5 billion in long contracts.
Experienced traders are more accustomed to Bitcoin’s 120% annual volatility, so a 12% price fluctuation is not particularly terrifying. In fact, top traders and arbitrage decks remained relatively calm during the dip.
To understand whether or not Bitcoin is showing bearish signals, traders may skew the long-to-short ratio of top traders on crypto exchanges, the futures premium and the options.
OKEx longs are 2.5 times larger than shorts
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.
OKEx top traders have been adding long positions since January 19, moving the indicator from 0.96 (slightly net short) to a 2.49 ratio, favoring longs. This is the highest level in 30 days and indicates an unusually extreme imbalance.
On the other hand, top traders at Huobi had an average long-to-short ratio of 0.91 for the past 30 days, preferring net shorts at 9%. On January 20, they added net short positions to a ratio of 0.86, but bought them back as BTC plummeted during the early hours of January 21. So they are back to their 0.91 long-to-short monthly average.
Finally, for the past 30 days, top Binance traders held an average of 21% favoring longs. These traders appear to be liquidating as their net long positions have been reduced to 1.02 from 1.18 since the end of January 20. According to data from Coinalyze, 40% of BTC’s total long-term liquidations took place at Binance in the last 24 hours.
Futures premiums rose
Professional traders tend to dominate longer-term futures contracts with fixed expiration dates. By measuring the cost gap between futures and the regular spot market, a trader can measure the level of optimism in the market.
The 3-month futures are usually traded at a premium (basis) of 6% to 20% on an annual basis compared to regular spot exchanges. Anytime this indicator fades or goes negative, it’s an alarming red flag. This situation is known as backwardation and indicates that the market is turning bearish.
On the other hand, a sustainable base of more than 20% indicates excessive leverage from buyers, creating the potential for massive liquidations and eventual market crashes.
The chart above shows that the indicator has ranged from 3.5% to 5.5% since December 13, translating into a moderately bullish 19% year-on-year. Meanwhile, the recent peak of 6.5% equates to a 29% annualized premium, indicating excessive leverage from buyers.
While this isn’t the exact reason for today’s correction, market makers and arbitrage desks know exactly how to play in this situation. Lowering the price would certainly lead to a large number of liquidations and it should also be noted that open interest on futures had just hit an all-time high.
Currently, the premium for BTC March contracts has stabilized around 2.5%, which equates to a healthy 14% year-on-year.
20% accidents are the rule rather than the exception
It is important to consider that Bitcoin has a 60-day volatility of 4.2%. Therefore, these major corrections are to be expected.
Bitcoin suffered a 20% crash and was tested levels below $ 28,000 on Jan. 4, and this was followed by a 27% intraday drop on Jan 11. For those brave enough to buy each of these dips, a recovery of up to 30% followed less than four days later.
The views and opinions expressed here are solely those of the author and do not necessarily reflect Cointelegraph’s opinion. Every investment and trade move carries risks. You should do your own research when making a decision.