Bitcoin’s price is looking for another annual high, but professional traders refusing to open long positions is a downward sign.
For novice traders, the FOMO can be a heavy burden to bear. Resisting the temptation to buy Bitcoin (BTC) after a rise of nearly 15%, in which the price broke through the $12,000 and $13,000 levels in less than 24 hours, is practically impossible.
Professional traders are more experienced and know exactly how to play with these FOMO-inducing situations. As the data has shown, most were opening short positions until October 20th just before the price exceeded USD 12,000.
Most investors do not understand that being a professional trader does not mean that all emerging trends are profitably exploited. Instead, surviving when things go wrong is the true mark of success.
When Bitcoin shot up to USD 13,217, there were settlements totaling USD 350 million, and the funding rate of futures contracts shows that there was no excessive short leverage.
Perpetual contracts, also known as reverse swaps, have an insertion rate that is generally charged every eight hours. When the short ones are the most highly leveraged, the funding rate becomes negative. Therefore, it is these shorts that will pay the fees.
The chart above shows that such a situation has not occurred in recent weeks, at least not in a significant way. Therefore, despite selling before the price rise, major traders were not forced to divest themselves of their leveraged short positions.
The data shows that professional traders covered their short positions on 21 October and are staying away from making upward bets. This action is supported by both the long-shorts ratio of the major traders on the cryptosystems exchanges and the premium on the futures contracts.
Professional traders covered their shorts but are not willing to bet on the long term
Based on the relationship between long (buyers) and short (sellers) of Huobi, there are no signs of aggressive buying. The data indicates that major traders are not sure that the current trend is sustainable despite some hedging activity on their short positions.
The relationship between long and short had remained relatively neutral until October 21. Suddenly, major traders decided to go short when BTC broke the USD 12,500 resistance. This morning, when BTC refused to lose ground, these traders began to hedge their short positions.
However, at the moment, there are no signs of upward bets as the latest Huobi data favouring long positions at 10% came in over a fortnight ago.
As far as OKEx’s major traders are concerned, a similar pattern emerged, although short trading occurred before the USD 12,000. This indicator continues to favour shorts, a trend that emerged in mid-September and has continued ever since.
To confirm whether there was a change in sentiment, one must be aware of the premium on futures contracts. Generally, these contracts trade at a slight premium in healthy markets of any asset class.
Rising markets will cause sellers of futures contracts to demand a higher price to postpone settlement rather than selling on the regular spot markets. If the current level of USD 13,000 was able to restore the upward momentum, this should be reflected in this indicator.
As Cointelegraph and Digital Assets Data show, the current premium of 1.8% is in line with the same level seen three weeks ago when Bitcoin was trading at USD 11,500. This data is further evidence that major traders are not confident in buying Bitcoin despite a 13% price increase since then.
The option markets have been through some turbulence
Implied volatility is the main metric that can be extracted from the price of options. Whenever traders perceive greater risk from more pronounced price movements, the indicator will move upwards. The opposite occurs during periods when the price is stable or the expectation of a price swing is slight.
Bitcoin’s implied volatility had been on a downward trend for the past six weeks, but yesterday’s move appears to have surprised option traders. Not only did the indicator move from 55% to 70%, but the volume traded in options contracts (USD 575 million) was three times the average.
The unexpected spike in volatility and the resulting partial retreat to the current level of 64% indicate that some traders were poorly positioned and had to close their positions abruptly.
According to the Black-Scholes model, an implied volatility movement of 15% causes the December call price of USD 14,000 to move by 40%. This change shows that events such as yesterday’s are sensitive to leveraged traders, as any leverage above 3 times would have been liquidated.
Following the long/short ratio and the premium on futures contracts, there is hardly any relevant buying activity by major traders. This disinterest raises a yellow flag as chain data shows that as the price of Bitcoin rose above USD 13,000, 22% of BTC’s total supply was processed, a historic record.
This move could be a potential signal that large entities are preparing to sell. Still, it should be remembered that unless those Bitcoins have been transferred to exchanges, OTC transactions tend to have less impact on price.