Bitcoin (BTC), which has lost $24,000 of its support, was unable to do so since Celsius, a popular lending and staking platform, stopped withdrawals on June 13. Many users are now claiming Celsius mismanaged its funds after the collapse of the Anchor Protocol on the Terra. (LUNA) – Rumours of its insolvency persist.
A larger problem emerged on June 14, when crypto venture capital firm Three Arrows Capital (3AC), lost $31.4 million to trading on Bitfinex. 3AC was also a well-known investor in Terra. Terra experienced a 100% crash in May.
Unconfirmed reports claim that 3AC was subject to liquidations amounting to hundreds of millions. Multiple positions agitated Bitcoin in the early hours June 15. This caused Bitcoin trading at $20,060, the lowest level since Dec. 15, 2020.
Let’s look at the current derivatives metrics and see if June 15’s bearish tendency reflects top traders sentiment.
After a brief spike of longs, margin markets became deleveraged
Margin trading allows investors the opportunity to borrow cryptocurrency to increase their trading positions and potentially increase their returns. To increase exposure, you can borrow Tether (USDT), to buy cryptocurrency.
Bitcoin borrowers can also shorten the cryptocurrency if the price falls. And unlike futures contracts where the balance between margin shorts and longs isn’t always equal, it can be done. Analysts monitor lending markets to see if investors are bullish or bearish.
Margin traders raised their leverage long (bull), position on June 14, to the highest level in 2 months.
Bitfinex margin Bitcoin/USD shorts/longs ratio. 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 chart above shows that even on June 14th, the number of BTC/USD short margin contracts was 49 times greater than the number long-term contracts. That is 107,500 BTC. This indicator was last seen below 10 on March 14, favoring longs. This result was good news for counter-traders as Bitcoin rallied 28% in the two weeks that followed.
Pro traders were liquidated according to data from Bitcoin futures
Externalities that could have had an impact on margin instruments are not included in the long-to-short net ratio of top traders. Analyzing these whale positions on spot, perpetual, and futures contracts can help you to determine if professional traders are bullish, or bearish.
Exchanges’ top traders Bitcoin long-to-short ratio. Source: Coinglass
It is important to recognize the methodological differences between exchanges so that absolute figures are less significant. Huobi traders, for example, have maintained their long-to short ratio between June 13th and Ju15. However, professional traders at Binance or OKX have reduced their longs.
This could be liquidations. It means that the margin deposit was not sufficient to cover their longs. To reduce exposure, the exchange’s deleveraging mechanism automatically sells the Bitcoin position. In either case, the long-to–short ratio will be affected which signals a lower bullish net position.
A buying opportunity could be found in liquidations
Data from derivatives markets (including futures and margin) shows that professional traders did not expect such a drastic and continuous price correction.
Professional crypto traders didn’t expect Bitcoin to drop an additional 37% in June despite a strong correlation with the stock market. The S&P 500 index lost 21.6% over the past year.
Although leverage can maximize gains, it can also lead to cascading liquidations like the one seen this week. Automated trading platforms of exchanges or DeFi platforms can sell investor positions at any price available when collateral is not sufficient to cover the risk. This puts heavy pressure on spot market prices.
Sometimes liquidations create an ideal entry point for those who are savvy enough to trade excessive corrections due lack of liquidity or insufficient bids on trading platforms. It will take several months to establish if this is the bottom.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.