In the past 24 hours, the price of Bitcoin (BTC) has dropped 14% and has tested the $ 32,000 support for the fifth time this year. Traders were probably even more concerned about the price dropping to $ 31,050, but at the time of writing, the 4-hour chart suggests that sales may be declining.
Currently, short-term charts indicate that Bitcoin is still flirting with bearish territory, but a number of derivative indicators and the flow of major traders reflect neutral levels to bullish ones.
In the last three times, the price of Bitcoin has dropped to less than $ 32,000, followed by a big rise of up to 30%. The data shows that the main OKEx traders have been buying the fall strongly and the future premium has remained in an optimistic range.
Even though traders are buying this current drop, the sharp drop of $ 4,200 has inflicted serious damage on some investors. The drop to $ 31,270 was followed by $ 460 million in settlement on derivatives exchanges. Interestingly, this occurred at a time when open contracts on BTC futures reached the highest value of $ 13.1 billion.
Today’s price movement may seem worrying, but it pales in comparison to the 24% drop in January 2010, which eliminated $ 1.5 billion in long contracts.
Veteran traders are more used to Bitcoin’s 120% annualized volatility, so a 12% price fluctuation is not particularly scary. In fact, the main operators and arbitration offices remained relatively calm during the fall.
To understand whether or not Bitcoin is issuing bearish signals, traders can analyze the long-to-short relationship of major traders in cryptographic exchange rates, the future premium and the distortion of options.
OKEx longs are 2.5 times bigger than shorts
The data provided by the exchange highlights the net long to short position of traders. By analyzing the position of each client on the spot, in perpetual and futures contracts, one can get a clearer view of whether professional traders are inclined upwards or downwards.
With that said, there are occasional discrepancies in methodologies between different exchanges, so viewers should monitor changes instead of absolute numbers.
The main OKEx traders have been adding long positions since January 19, taking the indicator from 0.96 (slightly net sold) to an index of 2.49, which favors long ones. This is the highest level in 30 days and indicates an exceptionally extreme imbalance.
On the other hand, Huobi’s main operators reached an average of 0.91 in the long / short ratio in the last 30 days, favoring net sales by 9%. On January 20, they added net short positions to an index of 0.86, but repurchased them when the BTC plummeted during the early hours of January 21. Thus, they are back to their monthly average of 0.91 long to short.
Finally, Binance’s main operators reached an average of 21% of the position that favored longs in the last 30 days. These traders appear to be being liquidated, as their net longs have been cut to 1.02 from 1.18 since the end of January 20. According to data from Coinalyze, 40% of the total of long BTC settlements in the last 24 hours occurred at Binance.
Futures prize skyrocketed
Professional traders tend to dominate long-term futures with defined expiration dates. By measuring the difference in expenses between futures and the regular spot market, a trader can assess the market’s bullish level.
3-month futures should generally be traded at an annualized premium of 6% to 20% (base) versus regular spot exchanges. Whenever this indicator weakens or becomes negative, it is an alarming red flag. This situation is known as backwardation and indicates that the market is becoming bearish.
On the other hand, a sustainable base above 20% signals an excessive leverage of buyers, creating the potential for massive liquidations and eventual market declines.
The chart above shows that the indicator has varied from 3.5% to 5.5% since December 13, translating into a moderately high 19% annualized base. Meanwhile, the recent peak of 6.5% is equal to an annualized premium of 29%, indicating excessive leverage by buyers.
While this is not the exact reason for today’s correction, market makers and arbitration boards know exactly how to handle this situation. Pushing the price down would certainly trigger a large number of settlements and it should also be noted that the number of open futures contracts had just reached its historic high.
Currently, the premium for BTC contracts in March has stabilized at around 2.5%, equivalent to a healthy annualized base of 14%.
20% of failures are the norm and not the exception
It is important to consider that Bitcoin has a volatility of 60 days of 4.2%. Therefore, these major corrections are to be expected.
Bitcoin faced a 20% drop and tested levels below $ 28,000 on January 4, and this was followed by a 27% intraday drop on January 11. For those brave enough to buy each of these drops, a recovery of up to 30% followed less than four days later.
The views and opinions expressed here are exclusively those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risk. You must conduct your own research when making a decision.