Bitfinex bitcoin long-short ratio hits a record high

By: Ikenna Odunze

September 14, 2022 8:26 AM

A key bitcoin price metric just hit a new all-time high, but is this a bullish or bearish move?

Sept. 12 will leave a mark that will likely remain for some time to come. Traders on the Bitfinex exchange significantly reduced their Bitcoin (BTC) leveraged bearish bets, and the lack of demand for short positions could be due to cold inflation data expectations.

The bears may have lost confidence in the US in August

The Consumer Price Index (CPI) is trending in the right direction, exceeding market expectations. Inflation, as measured by a broad basket of goods and services, increased by 8.3 percent over the previous year. In addition, food and housing prices rose, more than offsetting the 5% drop in energy prices over the same time period.

Shortly after worse-than-expected macroeconomic data was released, the U.S. p. Stock indexes suffered a decline, with tech-heavy Nasdaq Composite Index futures down 3.6% in 30 minutes. Cryptocurrencies accompanied the deteriorating sentiment, with the price of Bitcoin falling 5.7% over the same period, erasing gains from the past 3 days.

To blame the market's collapse on just one form of inflation would be naive. Sixty-two percent of global fund managers in a Bank of America survey predicted a recession, the highest percentage since May 2020. Michael Hartnett, the paper's strategist leader, gathered the data used in the study during the week of September 8.

Coincident with this, one indicator suggests that Bitcoin margin traders are more bullish than ever.

Bearish positions have been abandoned by margin traders

Through margin trading, investors can increase their holdings with less initial capital by borrowing stablecoins and reinvesting the proceeds in additional cryptocurrencies. However, when these traders lend bitcoin, they use the coins as collateral for short positions, which means they are betting on the price going down.

Therefore, some analysts keep an eye on the total holdings of bitcoin, lending, and stablecoins to determine if investors are generally showing a rising or falling trend. It's interesting to note that on September 12th, margin traders at Bitfinex reached their highest long/short leverage ratio.

Bitfinex margin traders are known to create position contracts of 20,000 BTC or more in a very short amount of time, indicating the involvement of whales and large arbitrage desks.

As the chart above shows, on September 12, the number of long BTC/USD margin contracts was 104,000 BTC, 86 times larger than short contracts. For reference, the last time this indicator rose above 75 and favored longs was on November 9, 2021.

Unfortunately for the bulls, the result benefited the bears as Bitcoin plunged 18% over the next 10 days.

Derivatives traders were too excited in November 2021

To understand , how bullish or bearish professional traders are positioned, one must analyze the futures strike price. Also known as the futures premium, this indicator measures the difference between futures contracts and the current spot market on regular exchanges.

3-month futures typically trade at an annualized premium of 5% to 10%, which is considered an opportunity cost of arbitrage trading. Notice how bitcoin investors paid inflated premiums for longs (buying) during the November 2021 rally, the complete opposite of the current situation.

On September 12, bitcoin futures contracts were trading at 1.2 % traded. Premium compared to normal spot markets.

This below 2% level has been the norm since August 15 and leaves no doubt about the lack of leveraged buying activity from traders.

Possible causes for the increase in margin lending ratio

Something must have caused the short margin traders on Bitfinex to reduce their positions, especially considering that the longs ( bulls) remained unaffected for days. until 12.09. The first likely cause is sell-offs, meaning sellers were short on margin as Bitcoin surged 19 between September 6th and 12th.

Other catalysts may have led to an unusual imbalance between longs and shorts.

For example, investors may have shifted margin trading collateral from Bitcoin to Ethereum for leverage as the meltdown nears.

Ultimately, the bears may have decided to temporarily close their margin positions due to volatility to close US inflation data. Regardless of the reason for the move, there is no reason to believe that the market has suddenly turned extremely bullish as the futures markets premium paints a very different scenario from the
of November 2021.

Bears still have a glass half full as Bitfinex margin traders have scope to add short (sell) positions with leverage. Meanwhile, the bulls can celebrate the apparent lack of interest in betting on prices below $20,000 from these whales.