BTC traders on Bitfinex and OKX are reluctant to use the margin markets for bearish bets, creating a dangerous imbalance that investors should beware of.
The desire of crypto traders to create leveraged positions with Bitcoin
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seems irresistible to many people, but it is impossible to know whether these traders are too risky or market traders who cover their positions. The need to maintain hedges, although traders rely on leverage to reduce counterparty exposure by keeping most of their positions in safe and cold wallets.
Not everyone is indifferent
Regardless of how traders use the trade, there is currently an unusual imbalance in the margin lending markets, which tends to lower BTC prices. Despite this, so far, movement in the margin markets has been limited, as BTC futures markets have remained relatively quiet throughout 2023.
Margin markets differ from futures contracts in two main ways. These are not derivative contracts, which means that trading takes place in the same order book as a normal spot trade, and unlike futures contracts, the balance between margin longs and shorts is not always consistent.
For example, after buying 20 bitcoins with margin, the coins can be withdrawn from the exchange. Of course, there must be some sort of security or margin deposit to trade, and this is usually based on stablecoins. If the borrower does not repay the position, the exchange will automatically reduce the margin to repay the lender.
The borrower must also pay an interest rate for the BTC bought on margin. Operating procedures vary between centralized and decentralized marketplaces, but typically the lender decides the rate and duration of the offer.
Margin traders can go long or short
Margin trading allows investors to borrow from stablecoins and use the proceeds to buy more cryptocurrency. When these traders borrow Bitcoin, they use the coin as collateral for short positions, which means that the price will fall.
Therefore, analysts monitor the total credit volume of Bitcoin and stablecoins, realizing that investors are closed. Interestingly, Bitfinex margin traders entered their highest leverage long/short ratio on February 26th.
Historically, Bitfinex margin traders have been known to create margin positions of 10,000 BTC or higher, indicating the involvement of whales and large arbitrage tables.
As the chart above shows, on February 26, BTC/USD long (bull) margin short (bears) increased 133 times to 105,300 BTC. Until 2023, the last time this indicator reached its highest level was on September 12, 2022. Unfortunately for the bulls, the result benefited the bears, as Bitcoin rallied 19% over the next six days.
Traders should cross-check information with other exchanges to ensure that anomalies are market-wide, especially since each market has different risks, standards, liquidity and availability.
OKX, for example, offers a margin loan indicator based on the stablecoin/BTC ratio. On OKX, traders can use stablecoins to buy bitcoin. On the other hand, Bitcoin borrowers can only invest when the price of the crypto currency falls.
As shown in the chart above, the margin lending ratio of OKX traders increased through February, indicating that professional traders added long positions, even though the Bitcoin price failed several times from February 16 to February 23 the resistance of could break $25,000.
In addition, on February 22, the margin ratio on OKX reached its highest level in six months. This level is highly unusual and is seen in line with the trend at Bitfinex, where strong volatility dominates Bitcoin margins.
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A difference in leverage value can explain the imbalance
The BTC long rate on Bitfinex is almost non-existent until 2023, currently sitting below 0.1% per year. In short, traders should not panic, the cost of margin credit remains in the zone considered healthy, and imbalances do not exist in the futures contract market.
There may be a reasonable explanation for the night movement. For example, the rising cost of stablecoin loans can be the debt.
Instead of the minimum rate for Bitcoin loans, stablecoin loans pay 25% per year on Bitfinex. This price increased significantly in November 2022, when the leading derivatives exchange FTX and their market maker, Alameda Research, exploded.