Bitcoin’s big sell-offs mean one man’s sorrow is another man’s pleasure: time to buy the fall?

Professional traders were forced to cut their losses after the margin and futures markets became over-leveraged, creating a potential entry point for bullish buyers.

Bitcoin (BTC) has failed to regain USD 24,000 support since Celsius, a popular investment and lending platform, halted withdrawals from its platform on 13 June. A growing number of users believe that Celsius mismanaged their funds following the collapse of Anchor Protocol in the Terra Luna ecosystem and rumours of its insolvency continue to circulate.

An even bigger problem emerged on 14 June after crypto venture capital firm Three Arrows Capital (3AC) reportedly lost USD 31.4 million through trading on Bitfinex. In addition, 3AC was a known investor in Terra, which experienced a 100% drop in late May.

Unconfirmed reports that 3AC faced liquidations totalling hundreds of millions from multiple positions roiled the market in the early hours of 15 June, causing Bitcoin to trade at USD 20,060, its lowest level since 15 December 2020.

Let’s take a look at today’s derivatives metrics to understand if today’s downtrend reflects the sentiment of the major traders.

Margin markets deleveraged after a brief surge in long positions

Margin trading allows investors to borrow cryptocurrencies and leverage their trading position to potentially increase returns. For example, one can buy cryptocurrencies by borrowing Tether (USDT) to increase exposure.

On the other hand, Bitcoin borrowers can short the cryptocurrency if they are betting on its price falling and, unlike futures contracts, the balance between long and short spreads does not always even out. That is why analysts monitor the borrowing markets to determine whether investors are leaning bullish or bearish.

Interestingly, margin traders boosted their long (bullish) leverage position on 14 June to the highest level in two months.

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

As the chart above indicates, even on 14 June the number of long margin contracts in BTC/USD outnumbered the short ones by 49 times, at 107,500 BTC. For reference, the last time this indicator was below 10, favouring the longs, was on 14 March. The result benefited the shorters at that time, as Bitcoin rose 28% in the following two weeks.

Bitcoin futures data shows professional traders were liquidated

The proportion of professional traders’ net positions excludes externalities that might have affected margin instruments. By analysing these whale positions in spot, perpetual and futures contracts, one can better understand whether professional traders are bullish or bearish.

It is important to note the methodological discrepancies between exchanges, so absolute figures are of less importance. For example, while Huobi traders have kept their ratio of long to short positions relatively unchanged between 13 and 15 June, professional traders on Binance and OKX reduced their long positions.

This movement could represent liquidations, meaning that the margin deposit was insufficient to cover their long positions. In these cases, the exchanges’ automatic deleveraging mechanism takes place by selling the Bitcoin position to reduce exposure. In either case, the ratio of long to short positions is affected and signals a less bullish net bias.

The sales could represent a buying opportunity.

Data from derivatives markets, including margin and futures markets, show that professional traders definitely did not expect such a deep and sustained price correction.

Although there has been a high correlation with the stock market and the S&P 500 index recorded a year-to-date loss of 21.6%, professional cryptocurrency traders did not expect Bitcoin to fall another 37% in June.

While leverage maximises profits, it can also force cascading liquidations such as those that occurred recently this week. Automated trading systems on exchanges and DeFi platforms sell investors’ positions at any price when collateral is insufficient to cover the risk, putting pressure on spot markets.

These liquidations sometimes create a perfect entry point for the savvy and brave to counter excessive corrections due to lack of liquidity and lack of bids on trading platforms. Whether or not this is the ultimate bottom will be impossible to determine until some months after all this volatility has passed.

Source: Cointelegraph.com

Disclaimer: The information set out herein should not be taken as financial advice or investment recommendations. All investments and trading involve risk and it is the responsibility of each individual to do their due diligence before making any investment decision.