Bitcoin (BTC) has been unable to close above $32,000 over the past 28 days, disappointing the bulls and pushing the fear and greed index to a bearish level below 10. With today’s small increase, the tech-heavy Nasdaq stock market index is down 24%. year to date.
Investors keeping a close eye on regulatory developments were likely scared after the US state of New York clarified its intention to regulate the crypto industry, including bitcoin mining.
On June 2, New York Attorney General Letitia James issued an investor alert against “risky cryptocurrency investments” citing asset volatility. According to Cointelegraph, the attorney general is convinced that crypto investments cause “more pain than gain” for investors.
The New York State Senate on June 2 approved a Proof of Work (PoW) mining ban and proposed controversial bill that aims to prohibit any new mining operations in the state for the next two years and is now headed to the governor’s desk. has gone.
Interestingly, as it all happens, bitcoin derivatives traders have never been so bullish by one metric.
Margin traders are extremely bullish
Margin trading allows investors to leverage their positions by borrowing stablecoins and using the proceeds to purchase more cryptocurrencies. When those savvy traders borrow bitcoins, they use the coins as collateral for shorts, which means they are betting on a decrease in value.
This is why some analysts monitor the total lending amount of bitcoin and stablecoins to see if investors are bullish or bearish. Interestingly, Bitfinex margin traders entered their highest leveraged long (bull) positions on June 6.
Bitfinex margin traders have been known to create position contracts of 20,000 BTC or more in a very short period of time, indicating the involvement of whales and large arbitrage desks.
Note that the Long (Bull) indicator increased significantly in mid-May and is currently at 90,090 BTC contracts, its highest ever registered. To understand how severe this movement was, compare it to June-July 2021, which is a record high of 54,500 BTC contracts in a long time.
These traders hit the bullseye as their bullish position was corrected as the price of bitcoin came down. In subsequent months, they can sell those long (bull) contracts at a profit, reducing the number of open long positions (blue line).
Sometimes even whales get it wrong
One can assume that these whales and arbitrage desks have better timing (or knowledge) of trading in the Bitfinex margin market, and thus it makes sense to follow in their footsteps. However, if we analyze the same metrics for 2019 and 2020, a completely different scenario emerges.
This time the number of Bitfinex BTC margin increased by three. The first event occurred in mid-November and mid-December 2019, when the indicator increased from 25,200 BTC to 47,600 BTC. However, in the following month, bitcoin price failed to break above $8,300 and these traders closed their positions with minimal gains.
The next wave of BTC longs occurred in early February 2020, but those traders were surprised after bitcoin price failed to break above $10,500, forcing them to close their margin positions at significant losses.
Bitfinex BTC Margin Long increased from 22,100 to 35,700 contracts at the end of July 2020. The movement coincided with the price rally to $47,000, so early entrants may have made some gains, but most investors exited their margin longs with no profit.
Clever Margin Long Time 75% May Be Correct, But There’s a Catch
To put things into perspective, in the last four instances where BTC margin long (bull) has increased significantly, investors had 1 profitable trade, 2 mostly neutral, and 1 significant loss.
Some might say that the odds are still in favor of the indicator watchers, but one must remember that whales and arbitrage desks can easily cause the market to crash when they close their positions. In such cases, those following the strategy may arrive late to the party and may be at a loss.
Will the long-term increase in existing Bitfinex margins be of great benefit? This may depend on how traditional markets, primarily tech stocks, perform over the next few weeks.
The views and opinions expressed here are solely those of Author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should do your own research when making a decision.