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A rising number of commentators have become pessimistic on Bitcoin and predict a substantial price collapse, yet data from the perpetual futures and options markets reveals a different story.
Margin trading enables investors to borrow stablecoins or cryptocurrencies in order to leverage their position and increase their projected return. Borrowing Tether (USDT), for example, allows one to purchase Bitcoin (BTC), boosting their Bitcoin long position.
Investors can also borrow BTC to margin trade a short position, thus betting on price downside. This is why some analysts monitor the total lending amounts of Bitcoin and Tether to gain insight into whether investors are leaning bullish or bearish.
Are analysts flipping bearish based only on Bitfinex’s margin data?
Some notable experts this week reported a rise in Bitcoin short positions on Bitfinex, which peaked at 6,621 BTC on June 7. As previously reported, independent researcher Fomocap discovered a clear link between margined short positions and the May 19 price drop.
However, when a larger range of data is examined — including margin longs, perpetual contracts financing rate, and protective put options — there is little sign of important players bracing for a surprise negative move.
A single instance of Bitcoin margin shorts increasing before of a downward price move should not be seen as a leading signal. Furthermore, Bitcoin margin longs – an opposite, typically greater force — must be considered.
Even on May 17, the number of BTC/USD long margin contracts outnumbered shorts by 3.6, at 39,000 BTC, as shown in the figure above. In fact, the last time this indicator fell below 2.0 and favoured longs was on November 26, 2020. The outcome was not favourable for the shorts, as Bitcoin gained 64 percent over the next 30 days.
Traders that borrow Tether and stablecoins are most often long on cryptocurrencies. BTC borrowing, on the other hand, is mostly employed for short holdings.
In theory, anytime the USDT/BTC loan ratio rises, the market is slanted bullishly. The OKEx ratio hit a low of 3.5 on May 20, favouring longs, but immediately rebounded to 5.5. As a result, there is little indication of a large shift in favour of shorts in margin markets.
The perpetual futures funding rate is still flat
Perpetual futures prices trade extremely close to ordinary spot markets, making ordinary traders’ life more easier by eliminating the need to compute the futures premium.
This sorcery can only be done by the financing rate paid by longs (buyers) when additional leverage is demanded. When the situation is flipped and shorts (sellers) are over-leveraged, the funding rate falls and they are the ones who pay the price.
Since May 19, the financing rate has remained relatively flat, as seen above. The indicator would have showed a tremendous rise in shorting demand if there had been one.
The put-to-call option ratio stays positive
The call (buy) option protects the buyer’s price from rising, whereas the put (sell) option does the reverse. Put options are often used by traders pursuing neutral-to-bearish strategy. Call options, on the other hand, are more typically employed for bullish positions.
Take note of how neutral-to-bullish call options outweigh defensive puts by over 90%. This ratio would have been influenced favourably if professional traders and whales had anticipated a market meltdown.
Investors should not rely their trading selections on a single signal because the remaining marketplaces and exchanges may not support it. For the time being, there is little sign that large players are betting on Bitcoin short bets.