CME Bitcoin derivative traders had ‘paper hands’ as BTC surpassed $55,000 — Source

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Traders sold long Bitcoin derivatives contracts ahead of the October price rally, ignoring solid on-chain fundamentals.

Bitcoin (BTC) derivatives traders on the Chicago Mercantile Exchange (CME) missed out on massive profits this week as the spot price of BTC smashed through $55,000.

Retail investors reduced their long exposure across the Bitcoin futures and options markets in late September, according to data shared by Ecoinometrics. The amount of open short positions also climbed, indicating that derivative traders anticipated Bitcoin’s price to drop, as shown in the chart below.

CME Bitcoin derivatives — retail traders. Source: CFTC “Commitments of Traders” report, Ecoinometrics

The data was collected on September 28, when the price of Bitcoin had fallen below $41,000 on Coinbase, a drop of nearly 23% from the month-to-date high near $52,950. The drop occurred as a result of China’s decision to prohibit all types of cryptocurrency transactions.

“Most likely, this drop is the result of traders failing to roll their long positions to the October contract and some outright liquidating when BTC looked like it was going to drop below $40k last week,” said Nick, an analyst at Ecoinometrics.

“Regardless, the overall picture is that the futures traders lack conviction.”

“That’s paper hands 101,” the analyst noted.

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Smart money

Institutional investors in the CME Bitcoin futures market also followed retail sentiment as they reduced their long exposure in the market. But, on the other hand, their short positions climbed.

CME Bitcoin derivatives — smart money. Source: CFTC “Commitments of Traders” report, Ecoinometrics

With CME options traders convinced that Bitcoin price would drop, the number of puts — an implicitly bearish bet on Bitcoin’s price — turned out to be almost twice the size of the calls, or bets on potential Bitcoin price gains.

CME Bitcoin options — puts vs. calls open interest. Source: Ecoinometrics

The distribution of traders’ positions resulted in $40,000 being the most sought-after strike price target.

Some options traders, on the other hand, predicted that the spot Bitcoin price would reach $60,000 by the end of October. Furthermore, analyst Crypto Hedger pointed out that Bitcoin options expiring on Nov. 26 show bulls’ sentiment skewed towards the $80,000 strike target.

 

Buy/sell volume in the last 24 hours for Nov. 26 Bitcoin options contract. Source: Laevitas, Crypto Hedger

“At this current growth pace, Bitcoin has formed very strong support at the $50,000 price point, and short-term traders may also need to watch out for the key resistance level around $56,000,” said Konstantin Anissimov, executive director of CEX.IO, adding:

“A break below or above these levels can stir another cataclysmic price reversal or a massive run toward $60,000 in Q4.”

Bitcoin supply squeeze in play

Ecoinometrics’ on-chain data also revealed a higher level of Bitcoin withdrawals from all crypto exchanges.

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In particular, Bitcoin’s 30-day nett exchange flow has been increasing since July 2020, as shown in the color-coded chart below, with blue indicating extreme outflow and red indicating extreme inflow.

Bitcoin rolling net exchange flow. Source: Coinmetrics

Ecoinometrics noted that the amount of Bitcoin currently leaving exchanges is higher than it was in the previous four-year halving cycles.

Bitcoin rolling net exchange inflow (second halving vs. third). Source: Coinmetrics 

Meanwhile, traders see the decrease in Bitcoin supply on exchanges, combined with increased “hodling,” as additional catalysts for a liquidity crisis and further price rises.

“There were indeed periods of nett outflows back then, but in terms of size, they appear much less dramatic than what we have now,” Ecoinometrics noted, adding:

“That’s another sign that we are on course for a liquidity crisis which could drive Bitcoin’s value much higher than it is right now.”

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