Bitcoin (BTC), which has not been able to close above $32,000 in the last 28 days, frustrates bulls and pushes the Fear and Greed index below 10. Despite a small boost on June 6, the tech-heavy Nasdaq stock exchange index is still down 24% for the year.
Investors who monitor regulatory developments were likely to be scared after New York State made it clear that it intends to regulate the cryptocurrency industry, including Bitcoin mining.
Letitia James, New York Attorney General, issued an investor alert on June 2 warning against “risky crypto investments” citing volatility. Cointelegraph reports that the attorney general believes crypto investments cause more pain than gains for investors.
On June 2, the New York State Senate approved a Proof-of-Work (PoW), mining ban. The controversial bill, which aims to ban any new mining operations within the state over the next two-years, is now heading for Governor’s Desk.
It is interesting to note that Bitcoin derivatives traders are now more bullish than ever, according one metric.
Margin traders are very bullish
Margin trading allows investors leverage their positions by borrowing stablecoins, and then using the proceeds to purchase more cryptocurrency. These savvy traders use Bitcoin as collateral to buy shorts.
Analysts monitor the total lending amount of Bitcoin and stablecoins in order to determine whether investors are bullish or bearish. On June 6, Bitfinex margin traders took their largest ever leverage long (bull), position.
Bitfinex BTC Margin Longs (blue), in BTC Contracts Source: TradingView
Bitfinex margin traders have a reputation for creating position contracts worth 20,000 BTC or more in very short periods of time. This indicates the participation of large arbitrage desks and whales.
The longs (bull indicator) increased dramatically in May and now stands at 90.090 BTC contracts. This is its highest-ever registry. This movement is comparable to the 54,500 BTC longs contracts that reached their highest level in June-July 2021.
This was a great time for these traders, as their bullish positions peaked just as Bitcoin prices bottomed. They were able to sell their long (bull) positions at a profit over the following months, decreasing the number of long open positions (blue line).
Even whales sometimes make mistakes
It might be argued that arbitrage desks and whales trading at Bitfinex margin market have better timing and knowledge, so it is logical to follow their lead. But if you look at the same metric in 2019 and 2020, it’s quite different.
Bitfinex BTC Margin Longs (Blue), in BTC Contracts Source: TradingView
Three increases in Bitfinex BTC margin longers were observed this time. After the indicator increased from 25,200 BTC up to 47,600 BTC longs, the first occurred in mid-November and December 2019. The Bitcoin price did not rise above $8,300 over the next month and these traders were forced to close their positions.
In February 2020, the next wave of BTC longs was held. However, traders were taken by surprise when Bitcoin’s price fell below $10,500. They had to close their margin positions for a significant loss.
Bitfinex BTC margin-longs increased from 22,100 contracts to 35,700 contracts late-July 2020. This movement occurred in tandem with the price rise to $47,000. So while early entrants may have made some profits, most investors lost their margin longs.
Clever margin longs may be correct 75% of the time, but there is a catch
For perspective, in the four previous instances of BTC margin longs increasing (bulls), investors made one profit, two were neutral, and one was a significant loss.
While some might argue that the odds favor those who are following the indicator, one should remember that arbitrage desks and whales can easily crash the market by closing their positions. If this happens, the strategy could be deemed unsuccessful and the participants might lose their money.
The current Bitfinex margin longs will increase, or will they result in huge profits? It could depend on how traditional markets, mostly tech stocks, perform in the coming weeks.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.