In the last 24-hour Bitcoin (BTC) price fell 14 percent and checked the $32,000 support for the fifth time this year. Traders were presumably even more concerned when the price declined to $31,050, but at the time of writing the 4-hour chart shows that sales could slow down.
Actually, shorter-term charts suggest that bitcoin is still flirting with bearish terrain, but a variety of futures indices and top traders are showing stable to bullish ranges.
The last three times the price of Bitcoin dropped below $32,000, followed by a massive rebound of up to 30 percent, which could happen again. Data reveals that OKEx’s top traders have been heavily purchasing the dip and the futures premium has stayed bullish.
Even though buyers are purchasing this new dip, the sharp $4,200 decline caused significant harm to some investors. The step down to $31,270 was followed by $460 million in derivative market liquidations. Interestingly, this happened only as open interest on BTC futures hit an all-time high of $13.1 billion.
Today’s market activity might sound worrisome, but it’s pale in contrast to the Jan.10 24 percent collapse that wiped out $1.5 billion in long contracts.
Veteran traders are more used to Bitcoin’s 120 percent annualized fluctuations, but a 12 percent price swing isn’t especially frightening. In reality, the top traders and the arbitration deks remained relatively calm throughout the dip.
To consider whether or not Bitcoin flashes bearish signs, traders should evaluate the long-to-short ratio of top traders to crypto outputs, futures spreads, and options skew.
OKEx longs are 2.5 times larger than shorts
Exchange-provided data illustrates the long-to-short net positioning of traders. Through evaluating the stance of an investor on-site, perpetual, and potential futures, it is possible to gain a better picture of whether skilled traders are bullish or bearish leaning.
That said, there are occasional variations in methodologies between different exchanges, so viewers can track improvements instead of absolute numbers.
OKEx’s top traders have been adding long positions since January 19, pushing the metric from 0.96 (slightly net short) to a 2.49 ratio that supports long positions. This is the highest incidence in 30 days, showing an unusually severe disparity.
On the other hand, Huobi’s top traders averaged a long-to-short ratio of 0.91 over the last 30 days, preferring net shorts by 9%. On Jan. 20, they added net short positions down to a 0.86 ratio but repurchased them as BTC plummeted in the early hours of Jan. 21. They are now back to their monthly average of 0.91 long-to-short.
Last but not least, Binance’s top traders averaged a 21 percent position that favored longs over the past 30 days. These traders appear to be being liquidated as their net lengths have been reduced to 1.02 from 1.18 since late Jan. 20. According to data from Coinalyze, 40 percent of the overall BTC liquidations over the last 24 hours have taken place in Binance.
The futures premium spiked
Skilled traders prefer to dominate longer-term futures contracts with fixed expiry dates. By calculating the cost difference between the futures and the regular spot market, an investor may calculate the extent of market turmoil.
Three-month futures are typically required to trade between 6% and 20% of annualized premiums (base) and daily spot exchanges. If this symbol fades or goes negative, it is a troubling red flag. This condition is known as backwardness and suggests that the economy is turning bearish.
In the other hand, a sustained basis of over 20% implies undue leverage on the part of investors, creating the opportunity for major liquidations and subsequent market crashes.
The above graph reveals that the indicator ranged from 3.5 percent to 5.5 percent after Dec. 13, which corresponds to a fairly bullish 19 percent annualized basis. Meanwhile, the latest 6.5 percent high is equivalent to 29 percent of the annualized premium, suggesting undue leverage for buyers.
While this is not the precise explanation for today’s correction, market makers and arbitration boards know exactly how to deal with this situation. Pushing down the price would definitely cause a large amount of liquidation, and it should also be remembered that open interest futures have just hit an all-time high.
Actually, the BTC March contract premium has stabilized at about 2.5 percent, equivalent to a stable 14 percent annualized basis.
20% crashes are the norm rather than the exception
It is necessary to consider that Bitcoin holds a 60-day variance of 4.2 percent. These major corrections can also be predicted.
Bitcoin faced a 20 percent plunge and tested sub-$28,000 on Jan. 4, followed by a 27 percent drop on Jan. 11. For anyone bold enough to buy one of these falls, a rally of up to 30% occurred less than four days later.
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