September 12 will leave a mark that will likely remain for some time. Traders on the Bitfinex exchange significantly reduced their leveraged bearish Bitcoin (BTC) bets and the absence of demand for shorts may have been due to expectations of cool inflation data.
The bears may have lacked confidence, but the August US Consumer Price Index (CPI) beat market expectations and they appear to be on the right side. The inflation index, which tracks a broad basket of goods and services, increased by 8.3% compared to the previous year. More importantly, the energy price component fell by 5% over the same period, but was more than offset by increases in food and shelter costs.
Soon after worse-than-expected macroeconomic data was released, U.S. stock indexes fell, with tech-heavy Nasdaq Composite 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 the gains of the previous three days.
To attribute the market decline to a single inflation metric would be naive. Bank of America survey with global fund managers, 62% of respondents said a recession is likely, the highest estimate since May 2020. The research paper collected data in the week of September 8 and was led by strategist Michael Hartnett.
Interestingly, as it all plays out, Bitcoin margin traders have never been more bullish, according to one metric.
Margin traders flew out of bearish positions
Margin trading allows investors to leverage their positions by borrowing stablecoins and using the proceeds to buy other cryptocurrencies. On the other hand, when these traders borrow bitcoins, they use the coins as collateral for shorts, which means they are betting on the price going down.
This is why some analysts track the total lending volumes of Bitcoin and stablecoins to understand whether investors are bullish or bearish. Interestingly, Bitfinex margin traders entered their highest long/short leverage ratio on September 12th.
Bitfinex margin traders are known to create position contracts of 20,000 BTC or more in a very short period of time, suggesting the participation of whales and large arbitrage desks.
As the chart above shows, on September 12, long margin BTC/USD contracts exceeded shorts 86 times, at 104,000 BTC. For comparison, the last time this indicator flipped above 75 in favor of longs was on November 9, 2021. Unfortunately for the bulls, the result benefited the bears as Bitcoin plunged 18% over the next ten days.
Derivatives traders got too excited in November 2021
To understand how bullish or bearish professional traders find themselves, we should analyze the underlying interest rate futures. This indicator is also known as futures premium and measures the difference between futures contracts and the current spot market on regular exchanges.
Three-month futures typically trade at a 5% to 10% annual premium, which is considered the opportunity cost of arbitrage trading. Note how Bitcoin investors paid excessive premiums for longs (buys) during the November 2021 rally, which is the complete opposite of the current situation.
On September 12, Bitcoin futures contracts were trading at a 1.2% premium to regular spot markets. Such a level below 2% has been the norm since August 15, leaving no doubt that traders are under-buying with leverage.
Possible causes of a sharp increase in the margin indicator
Something must have caused the short margin traders on Bitfinex to reduce their positions, especially considering that the longs (bulls) remained flat for 7 days prior to September 12th. The first likely cause is liquidations, meaning sellers had insufficient margin when Bitcoin gained 19% between September 6th and 12th.
Other catalysts may have led to an unusual imbalance between longs and shorts. For example, investors could move hedges from Bitcoin margin trades to Ethereum in search of some leverage. Unite approaches.
Finally, bears may have decided to temporarily close their margin positions due to volatility around US inflation data. Regardless of the rationale for this move, there is no reason to believe that the market has suddenly become extremely bullish, as futures premiums paint a very different scenario from November 2021.
Bears are still worth half as Bitfinex margin traders have room to add leveraged short (sell) positions. Meanwhile, bulls can celebrate these whales’ apparent disinterest in betting on prices below $20,000.
The views and opinions expressed here are solely the opinions author and do not necessarily reflect the views of Cointelegraph. Every investment and trading step involves risk. You should do your own research when deciding.