Professional traders were forced to pare losses after the margin and futures markets became overly leveraged, creating a potential entry point for bullish buyers.
Bitcoin (BTC) has failed to regain $24,000 support since Celsius, the popular betting and lending platform, suspended withdrawals from its platform on June 13. A growing number of users believe that Celsius mishandled their funds after the Anchor protocol collapsed. The Terra (LUNA; now LUNC) ecosystem and rumors of its bankruptcy continue to circulate.
An even bigger problem emerged on June 14 after cryptocurrency venture capital firm Three Arrows Capital (3AC) reportedly lost $31.4 million trading on Bitfinex. Additionally, 3AC was a prominent investor in Terra, which suffered a 100 percent collapse in late May.
Unconfirmed reports that 3AC was facing liquidations in the hundreds of millions across multiple positions rocked the market in the early hours of June 15, causing Bitcoin to trade at $20,060, its lowest level since June 15.
Let’s take a look at recent derivatives performance to see if the June 15 bearish trend reflects the sentiment of top traders.
The leveraged markets fell after a brief surge in the longs
Margin trading allows investors to borrow cryptocurrencies and use their trading position to potentially increase their profits. For example, you can buy cryptocurrency by borrowing Tether (USDT) to increase your risk.
On the other hand, Bitcoin borrowers can short a cryptocurrency if they bet on its price going down, and unlike futures contracts, the balance between margin longs and shorts does not always match. For this reason, analysts monitor credit markets to determine whether investors are leaning toward bullish or bearish sentiment.
Interestingly, on June 14th, margin traders increased their long position (bullish) to its highest level in two months.
Bitfinex Margin Long/Short Bitcoin/USD ratio. Source: Trade View
Bitfinex margin traders are known to create position contracts of 20,000 BTC and more in a very short period of time, indicating the involvement of whales and large arbitrage tables.
As you can see from the chart above, even on June 14, the number of long BTC/USD margin contracts exceeded the number of short contracts by 49 times to 107,500 BTC. For reference, this indicator was last below 10 on March 14 in favor of long positions. Back then, the result benefited counter traders as Bitcoin surged 28% over the next two weeks.
Bitcoin futures data shows professional traders have been liquidated
The top traders’ net long/short ratio excludes external factors that may have affected leveraged instruments. By analyzing these whale positions in situ, perpetual contracts and futures contracts, one can better understand whether professional traders are bullish or bearish.
The ratio of long and short bitcoins from the leading exchange traders. Source: coin jar
It’s important to note the methodological discrepancies between different exchanges, so absolute numbers are less important. For example, while Huobi traders maintained a relatively flat long/short ratio between June 13 and July 15, professional traders at Binance and OKX reduced their long positions.
This move could have resulted in liquidation, meaning the margin deposit was insufficient to cover their long positions. In these cases, the exchange’s automatic deleveraging mechanism is implemented by selling the Bitcoin position to reduce risk. Either way, this affects the long/short ratio and signals a less bullish net position.
Liquidation may present a buying opportunity
Data from the derivatives markets, including margins and futures, shows that professional traders certainly did not expect such a deep and prolonged price correction.
Although there is a high correlation with the stock market, with the S&P 500 index posting a 21.6% year-to-date loss, professional crypto traders didn’t expect Bitcoin to fall another 37% in June.
While leverage allows for profit maximization, it can also lead to cascading liquidations like the recent events that took place this week. Automated trading systems of exchanges and DeFi platforms sell investor positions at any available price when collateral is not sufficient
