Bitcoin (BTC), trading’s first rule should be to “expect unexpected” – there have been five instances where the daily gain was 20% or more, and five instances when the intraday drawdown was 18%. The volatility over the past three months has been quite low compared to recent highs.
Historical 90-day annualized volatility in Bitcoin. Source: TradingView
New traders to Bitcoin often find themselves captivated by the 19% correction following a local top, whether they are multi-millionaire institutional fund managers or retail investors. The fact that the $13,360 correction to the Nov. 10 $69,000 high was made in just nine days is even more shocking.
The down move didn’t trigger alarmingly-raising liquidations
The high-leverage trading of cryptocurrency traders is a well-known trait. In the last 4 days, nearly $600,000,000 worth of long (buy!) Bitcoin futures contracts was liquidated. Although it might seem like a good number, it is less than 2%.
Bitcoin futures aggregate open interests Source: Coinglass.com
The lack of any significant liquidation, despite the sharp price drop, is the first sign that the 19% decline to $56,000 was a local bottom. If there had been excessive buyers’ leverage, which is a sign that the market was unhealthy, then the open interest would have seen an abrupt change similar to the one on Sept. 7.
The risk gauge for options markets remained calm
Investors should examine the 25% delta skew to determine how concerned professional traders are. This indicator gives investors a reliable look into “fear” and “greed” sentiment by comparing similar call-buy and put-sell options.
When the premium for neutral-to-bearish options is greater than similar-risk options, this metric will be positive. This is a common “fear” scenario. The opposite trend is bullishness or “greed”.
Bitcoin 30-day Options 25% Delta skew Source: Laevitas.ch
Negative 7% to positive 7% values are considered neutral. Nothing unusual happened during the $56,000 support test. If arbitrage traders and pro traders had detected greater risks of market collapse, this indicator would have risen to 10%.
Margin traders still go long
Margin trading allows investors borrow cryptocurrency to increase their trading position and thus increase their returns. One can borrow Tether (USDT), which allows one to buy cryptocurrencies and increase their exposure. Bitcoin borrowers cannot shorten it, as they wager on its price falling.
Contrary to futures contracts, the margin shorts and longs are not always equal.
OKEx USDT/BTC margin lending ratio. Source: OKEx
The chart above shows that traders have borrowed more USDT in recent months, with the ratio increasing from 7 on Nov. 10, to the current 13. This data is bullish, as the indicator favors stablecoin borrowing 13 times. It could also be a reflection of their positive exposure to bitcoin price.
All the indicators mentioned above show resilience to the recent drop in BTC prices. Although anything can happen in crypto as previously stated, derivatives data suggests that $56,000 was the local bottom.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.