September 12 marked a significant shift in market sentiment as traders at Bitfinex exchange drastically reduced their leveraged bearish Bitcoin (BTC) positions. The lack of demand for short positions could be attributed to the anticipation of favorable inflation data.
The confidence among bears might have waned as the August U.S. Consumer Price Index (CPI) surpassed market expectations, showing an 8.3% increase over the previous year. While energy prices saw a 5% decline, this was offset by rising food and shelter costs.
Following the release of the disappointing economic data, U.S. equity indices experienced a decline, with tech-heavy Nasdaq Composite Index futures plummeting by 3.6% in just 30 minutes. This downturn in the market also affected cryptocurrencies, with Bitcoin prices dropping by 5.7% within the same timeframe, erasing gains from the previous three days.
It would be oversimplifying to attribute the market downturn solely to inflationary factors. A recent Bank of America survey revealed that 62% of global fund managers believed a recession was likely, the highest estimation since May 2020. The survey, conducted in the week of September 8, was led by strategist Michael Hartnett.
Interestingly, amidst these developments, Bitcoin margin traders displayed unprecedented bullishness according to a specific metric.
Margin traders shift away from bearish positions
Margin trading enables investors to amplify their positions by borrowing stablecoins to purchase more cryptocurrency. Conversely, when traders borrow Bitcoin, they utilize the coins as collateral for short positions, betting on a price decline.
Monitoring the total lending amounts of Bitcoin and stablecoins provides insight into whether investors lean towards bullish or bearish sentiments. Notably, Bitfinex margin traders reached their highest long-to-short ratio on September 12.
Bitfinex margin traders are recognized for rapidly creating position contracts of 20,000 BTC or more, indicating the involvement of whales and significant arbitrage desks.
On September 12, the number of BTC/USD long margin contracts exceeded short contracts by 86 times, totaling 104,000 BTC. The last time this ratio favored long positions above 75 was on November 9, 2021. However, this turn in favor of long positions resulted in an 18% Bitcoin price decline over the following 10 days.
Overexcitement among derivatives traders in November 2021
To gauge the positioning of professional traders, assessing the futures basis rate, or futures premium, is crucial. This indicator compares futures contracts with the current spot market prices on regular exchanges.
During the November 2021 rally, Bitcoin investors paid substantial premiums for long positions, in sharp contrast to the present scenario. On September 12, Bitcoin futures contracts traded at a 1.2% premium over spot markets, markedly lower than the typical 5-10% premium. This indicates a lack of leveraged buying activity among traders.
Potential factors behind the surge in margin lending ratio
The reduction in short positions at Bitfinex on September 12, amidst flat long positions in the preceding week, could have several causes. One possibility is liquidations, where sellers lacked sufficient margin due to Bitcoin’s 19% surge between September 6 and 12.
Other factors may have contributed to the imbalance between long and short positions. For instance, investors might have shifted collateral from Bitcoin to Ethereum margin trades in anticipation of leverage around the Merge upgrade. Additionally, bearish traders may have closed short positions temporarily due to volatility related to U.S. inflation data.
Regardless of the rationale behind these changes, there is uncertainty about the market’s sudden optimism, as the futures market premium paints a different picture from November 2021. Bears still have room to add leverage to short positions, while bulls benefit from the lack of interest in betting against prices below $20,000 by large traders.
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