Bitcoin (BTC) has seen significant volatility in the past week, with the price ranging between $27,200 and $30,000. While this 10.5% move may sound alarming, it resulted in $340 million in leveraged BTC futures contract liquidations. However, from a broader perspective, the Bitcoin price is up 72% year-to-date in 2021, while the S&P 500 stock market index has accumulated 9% gains. This suggests that the market is still bullish on Bitcoin despite the recent price fluctuations.
One factor contributing to Bitcoin’s bull run is the weakness of the US dollar. The dollar strength index (DXY), which measures the U.S. currency against a basket of foreign exchanges, was nearing its lowest level in 12 months during Bitcoin’s surge. The indicator currently stands at 102, down from 105.3 eight weeks prior, as investors priced in higher odds of further interventions from the U.S. Treasury to contain the banking crisis.
On May 1, the California Department of Financial Protection and Innovation closed down First Republic Bank (FRB) and transferred control to the Federal Deposit Insurance Corporation (FDIC). The FDIC then entered into a purchase and assumption agreement with JPMorgan to protect depositors. FRB joined Silicon Valley Bank and Signature Bank to become the latest U.S. bank to collapse in 2021. This banking crisis has further weakened the US dollar and contributed to Bitcoin’s price increase.
The upcoming Federal Reserve decision on interest rates on May 3 is causing Bitcoin investors to question the sustainability of the $28,000 support level. By pushing the rate return closer to 5%, the central bank removes incentives for risk markets investments, which is essentially negative for the price of Bitcoin.
To better understand how professional traders are positioned in the current market environment, let’s look at derivatives metrics. Margin markets provide insight into how professional traders are positioned because they allow investors to borrow cryptocurrency to leverage their positions. OKX, for instance, provides a margin lending indicator based on the stablecoin/BTC ratio. The above chart shows that OKX traders’ margin lending ratio increased between April 17 and April 30. This indicates that leverage has been used to support the Bitcoin price gains. Moreover, the 43% ratio favoring BTC longs on April 27 was the highest level in 40 days, indicating overexcitement as Bitcoin flirted with $30,000. However, this adjusted to 32% after the latest correction to $28,400.
To exclude externalities that might have solely impacted the margin markets, one should analyze the long-to-short metric. In addition, it gathers data from exchange clients’ positions on the spot, perpetual, and quarterly futures contracts, thus offering better information on how pro traders are positioned. Even though Bitcoin failed to break the $30,000 resistance, professional traders have increased their leveraged long positions using futures, according to the long-to-short indicator. This suggests that professional traders are unwilling to bet on Bitcoin’s price dropping.
At crypto exchange OKX, the long-to-short ratio sharply increased, from 0.66 on April 27 to the current 0.93 on May 1. Moreover, at Binance, the long-to-short ratio also increased, favoring longs, moving from 1.12 on April 25 to a 1.26 peak on April 30. Therefore, despite the 5% price decline from a high of $29,970 on April 30, the bears using futures contracts were not confident enough to add leveraged shorts. Simply put, even if Bitcoin retests $28,000, bulls should not yet throw in the towel as both margin and futures market indicators remain healthy.
It is important to note that this article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.