Bitcoin (BTC) derivatives traders on the Chicago Mercantile Exchange (CME) lost incredible profits when the spot BTC price reached $55,000 this week.
At the end of September, retail investors cut their long positions in the bitcoin futures and options markets, according to data provided by Ecoinometrics. The number of open short positions also increased, indicating that derivatives traders expected the price of Bitcoin to fall, as shown in the chart below.
CME Bitcoin Derivatives – Retail Traders. Source: CFTC Commitments of Traders Report, Ecoinometrics.
The data was obtained on September 28, when the price of BTC fell below $41,000 on Coinbase, down nearly 23% from its month-high of $52,950. The drop came after China banned all types of cryptocurrency transactions.
“This drop is likely due to the fact that traders are not pulling back from their long positions in the October contracts, and some are liquidating directly when BTC fell below $40,000 last week,” said Nick, an analyst at Ecoinometrics.
“However, the big picture is that futures traders lack confidence.”
“These are paper hands 101,” the analyst said.
Institutional investors in the CME bitcoin futures market also followed the sentiment of retail traders as they cut their long positions in the market. On the other hand, their short positions rose.
CME Bitcoin Derivatives – Smart Money. Source: CFTC Commitments of Traders Report, Ecoinometrics.
As CME options traders were convinced that the price of bitcoin would fall, the number of buying – obviously a bearish bet on the price of bitcoin – turned out to be twice as much as a call or bet on potential gains in the price of bitcoin.
Bitcoin CME Options – poses opposite challenges to opening interest. Source: Environmental Measurements
The trader’s spread made $40,000 the most sought-after target price.
On the other hand, some options traders are betting that the spot price of Bitcoin will reach $60,000 by the end of October. In addition, Crypto Hedger analyst stressed that the bitcoin alternatives expiring on November 26 show that bullish sentiment has shifted towards the $80,000 target.
Buying/Selling Volume in Last 24 Hours of November 26th Bitcoin Option Contract. Source: Laevitas, Crypto Hedger
“At current growth rates, Bitcoin has formed a very strong support at $50,000, and short-term traders may also need to look at a major resistance level around $56,000,” said Konstantin Anisimov, CEO of CEX.IO.
“A breakout below or above these levels could lead to another catastrophic price reversal or a massive $60,000 jump in the fourth quarter.”
On-chain data shared by Ecoinometrics also showed higher bitcoin withdrawal rates than all cryptocurrency exchanges.
In detail, the 30-day net bitcoin exchange flow has increased since July 2020, as shown in the color chart below, with blue and red indicating outflows and maximum outflows, respectively.
Pure bitcoin exchange flow. Source: Metal Scales
Ecoinometrics notes that the number of bitcoins currently leaving exchanges is higher than in the previous four-year halving cycles.
Net Bitcoin Revolving Exchange (the second halving cut compared to the third). Source: Metal Scales
Meanwhile, traders are seeing a decrease in the supply of bitcoin on exchanges with increased trading activity as additional catalysts for the liquidity crunch and additional opportunities for growth.
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Environmental measurements confirmed, “There were indeed periods of net turbulence at the time, but in terms of scale, they look much less dramatic than we have now,” adding:
“This is another sign that we are approaching a liquidity crunch that could lead to a much higher value for Bitcoin than it is now.”