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Bitcoin price drops to a two month low — Did pro traders benefit?

A massive amount of traders were liquidated as BTC price dropped to $25,300, but was it primarily retail traders that were washed out?

The price of Bitcoin (BTC) fell by 11.5% from Aug. 16 to Aug. 18, resulting in $900 million worth of long positions being liquidated and causing the price to hit a two-month low. Before the drop, many traders expected a breakout in volatility that would push the price upward but this was obviously not the case. With the substantial liquidations, it's important to address whether professional traders gained from the price crash.

There's a common belief among cryptocurrency traders that whales and market makers have an edge in predicting significant price shifts and that this allows them to gain the upper hand over retail traders. This notion holds some truth, as advanced quantitative trading software and strategically positioned servers come into play. However, this doesn't make professional traders immune to substantial financial losses when the market gets shaky.

For larger-sized and professional traders, a majority of their positions may be fully hedged. Comparing these positions with previous trading days allows for estimations on whether recent movements anticipated a widespread correction in the cryptocurrency market.

Margin longs at Bitfinex and OKX were relatively high

Margin trading lets investors magnify their positions by borrowing stablecoins and using the funds to acquire more cryptocurrency. Conversely, traders who borrow Bitcoin employ the coins as collateral for short positions, indicating a bet on price decline.

Bitfinex margin traders are known for swiftly establishing position contracts of 10,000 BTC or greater, underscoring the involvement of whales and substantial arbitrage desks.

As depicted in the chart below, the Bitfinex margin long position on August 15 stood at 94,240 BTC, nearing its highest point in four months. This suggests that professional traders were entirely caught off guard by the abrupt BTC price crash.

Bitfinex margin BTC longs, measured in BTC. Source: TradingView

Unlike futures contracts, the equilibrium between margin longs and shorts isn't inherently balanced. A high margin lending ratio signifies a bullish market, while a low ratio suggests a bearish sentiment.

OKX USDT/BTC margin lending ratio. Source: OKX

The chart above shows the OKX BTC margin lending ratio, which approached 35 times in favor of long positions on August 16. More importantly, this level aligned with the preceding seven-day average. This implies that even if external factors skewed the metric previously, it can be deduced that whales and market makers maintained their position on margin markets before the Bitcoin price collapse on Aug. 16 and Aug. 17. This information supports the argument that professional traders were unprepared for any form of negative price movement.

Futures long-to-short data proves traders were unprepared

The net long-to-short ratio of the top traders excludes external factors that may have exclusively influenced the margin markets. By consolidating positions across perpetual and quarterly futures contracts, a clearer insight can be gained into whether professional traders are leaning towards a bullish or bearish stance.

Occasional methodological disparities among different exchanges exist, prompting viewers to track changes rather than fixate on absolute values.

Exchanges’ top traders Bitcoin long-to-short ratio. Source: Coinglass

Prior to the release of the Federal Reserve FOMC minutes on August 16, prominent BTC traders on Binance exhibited a long-to-short ratio of 1.37, aligning with the peak levels observed in the previous four days. A similar pattern emerged on OKX, where the long-to-short indicator for Bitcoin's leading traders reached 1.45 moments before the BTC price correction commenced.

Related: Why did Bitcoin drop? Analysts point to 5 potential reasons

Irrespective of whether those whales and market makers augmented or diminished their positions post the initiation of the crash, data stemming from BTC futures further substantiates the lack of readiness in terms of reducing exposure prior to August 16, be it in futures or margin markets. Consequently, a reasonable assumption can be made that professional traders were taken by surprise and did not profit from the price crash.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Bitcoin Technical Analysis: BTC Consolidation Points to Potential Shifts Ahead

CPI report may show uptick in US inflation — How will Bitcoin price react?

Bitcoin price remains range bound as equities, gold and US Treasuries offer competitive rates with reduced risk. This week’s CPI report could shake things up.

The S&P 500 index is currently trading only 6% below its all-time high, which was reached in December 2021. Traditionally, such a situation would be seen as a bullish sign for risk-on assets, including commodities and cryptocurrencies, but this time, it appears that investors have been using the stock market as a means of protection against the recent inflation surge, which peaked at over 4% between April 2021 and May 2023.

For Bitcoin (BTC) and cryptocurrency investors, inflation has typically been viewed as a positive factor influencing the price, as evidenced by the previous all-time highs of $65,000 and $69,000 that occurred during a period of monetary expansion and increasing inflation in 2021. However, the current situation is different because inflation is making a comeback while the U.S. Federal Reserve (Fed) has been effectively reducing liquidity in the system. As a result, the impact of inflation on cryptocurrencies remains uncertain.

Is the tech stock bubble bursting?

The recent 7-day decline in tech giants, including Fortinet (FTNT) with a decrease of 25.7%, Block Inc. (SQ) with a drop of 20.5%, Paypal (PYPL) down by 15%, Shopify (SHOP) down 14.8%, and Palo Alto Networks (PANW) down 13.9%, has caught the attention of investors, particularly in light of the expectation of an additional interest rate hike by the Federal Open Market Committee (FOMC) on Sept. 20.

Economists predict that the Consumer Price Index (CPI) for July, which will be revealed on Aug. 10, will be around 3.3%, surpassing the previous month's figure of 3% and exceeding the central bank's 2% target. Given the latest unemployment rate of 3.5% in June, nearing a 40-year low, the movement toward tightening the Fed's economy becomes more certain.

During uncertain times, gold, a traditional safe-haven has struggled to surpass the $2,000 mark on multiple occasions since 2020, indicating a lack of confidence in its ability to hedge against risks.

Gold price in USD (blue, right) vs. S&P 500 index (orange, left). Source: TradingView

The real estate market has also been impacted, facing limited housing supply and rising mortgage rates, as evidenced by Redfin's 2Q revenue drop of 21% compared to the previous year. The company expects a further decline of 15% to 20% in transaction value for the 3Q.

Even traditionally considered safe assets like bonds are losing some of their appeal due to the ongoing increase in U.S. debt. Investment mogul and hedge fund billionaire Bill Ackman reportedly shorted 30-year U.S. Treasury bonds, expressing concerns about long-term inflation.

A July 31 report by the U.S. Treasury Department revealed a $1 trillion quarterly net borrowing estimate, and an unexpected Fitch Ratings downgrade of the U.S. debt further fueled concerns in the financial markets.

Consequently, investors are now seeking alternative markets, and Bitcoin whales have increased their leverage long positions using derivatives despite the cryptocurrency's price remaining around $29,500.

Bitcoin’s price support at $29,000 is backed by solid derivatives metrics

Bitcoin quarterly futures typically trade at a slight premium relative to spot markets, as sellers’ demand more money to delay the settlement. Healthy markets usually display BTC futures contracts trading at a 5% to 10% annualized premium, a situation known as contango, which is not unique to crypto markets.

Bitcoin 3-month futures premium. Source: Laevitas.ch

The BTC futures premium (or basis rate) on platforms like Deribit and OKX reached 8%, the highest in over three weeks. This higher premium signals pro traders are willing to pay an additional cost to engage in leverage longs, thus reflecting a positive sentiment toward Bitcoin.

Traders can also gauge the market’s sentiment by measuring whether more activity is going through call (buy) options or put (sell) options. A 0.70 put-to-call ratio indicates that put option open interest lags the more bullish calls and is, therefore, bullish. In contrast, a 1.40 indicator favors put options, which can be deemed bearish.

BTC options volume put-to-call ratio. Source: Laevitas.ch

The put-to-call ratio has been below 1 since July 24 revealing a strong demand for call (buy) instruments. Such data suggests investors' optimism in the potential price appreciation of Bitcoin.

There is a growing indication that Bitcoin might potentially benefit from the inflation surge. However, if investors start to believe that the Federal Reserve's idea of a soft landing for the economy is unlikely and that a severe recession is on the horizon, they are likely to favor Treasuries and cash positions initially.

In the short to mid-term, there is not much evidence to suggest that Bitcoin will experience a significant surge if inflation becomes widespread in the U.S. Nevertheless, there is hope for bullish investors as the cryptocurrency has shown solid support at the $29,000 mark.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Bitcoin Technical Analysis: BTC Consolidation Points to Potential Shifts Ahead

Litecoin price at risk of a 30% drop if key LTC futures historical trend repeats

A multiyear review of Litecoin futures open interest reveals a unique trend that has significantly impacted the LTC price in the past.

With less than two weeks until Litecoin’s halving, when the miner’s block subsidy will be cut in half, traders are questioning whether the additional scarcity effect will be enough to sustain the LTC price above $90. 

Litecoin’s (LTC) price has declined by 19% in the last 18 days, but it has shown a positive 31% performance this year. Notably, most gains occurred between June 29 and July 2, with a 34% rally pushing the price to a 14-month high of $115.

Litecoin/USD 1-day price at Coinbase, 2023. Source: TradingView

However, there’s an alarming statistic coming from the derivatives market that indicates a sharp correction is likely underway.

Historical data doesn’t favor Litecoin bulls

Each of the previous three instances where Litecoin futures open interest dropped below $500 million caused price drops of 38% or higher, which potentially matches the current scenario.

Litecoin futures’ aggregate open interest in dollars from June 29 ($300 million) to July 2 ($615 million) shows there was a significant surge, indicating increased demand for leveraged futures contracts.

On July 2, Litecoin’s price reached a 14-month high but subsequently declined 20% to $92. However, the concerning aspect is Litecoin’s open interest remaining above the $500 million mark. This suggests buyers added margin to avoid liquidation, yet the risk of a sharp correction persists.

Litecoin futures aggregate open interest in USD over the past year. Source: CoinGlass

Higher active contracts (open interest) are generally positive, enabling investors who require a specific market size to participate. Even if it’s not necessarily bullish for price momentum, it allows for larger price swings due to leverage and potential liquidations when a trader’s position is closed due to a lack of margin.

A look back at the November 2021 crash and open interest

Litecoin’s open interest dropping below the $500 million threshold seems a reliable indicator of investors’ diminished interest, and the three latest occurrences confirm the thesis, as its price faced drastic corrections in each instance.

Litecoin futures aggregate open interest in USD, late 2021. Source: CoinGlass

On Nov. 10, 2021, Litecoin’s open interest surpassed $500 million, coinciding with a six-month price high of $289. Interestingly, Litecoin’s price crashed 48% in the 24 days after open interest dropped below $500 million on Nov. 14, 2021.

Litecoin/USD 1-day price at Coinbase, late 2021. Source: TradingView

Previously, Litecoin’s open interest had surged but failed to break the $500 million mark, and even a 40% price gain to $232 in early September couldn’t break that barrier.

Further confirming the relevance of open interest, two other instances occurred in 2021 between February and June, marking significant drawdowns after breaking the futures open interest $500 million threshold.

Similar events in February 2021 and May 2021

Litecoin/USD 1-day price at Coinbase, early 2021. Source: TradingView
Litecoin futures aggregate open interest in USD, early 2021. Source: CoinGlass

On Feb. 8, 2021, Litecoin’s open interest surged above $500 million, marking a 64% price gain, which peaked at $247 on Feb. 20, 2021. However, on the same day, open interest dropped below $500 million, leading to a 38% price decline in the next eight days. Notably, the $200 psychological price support held for five days before the Litecoin price declined to $142.

Again, on May 9, 2021, Litecoin’s open interest fell below $500 million after 49 days. It reached an all-time high of $409 during that period, followed by a 71% correction in just 13 days, settling at $118.

Though causation cannot be drawn from events of over 19 months ago, it’s essential to keep an eye on Litecoin’s open interest. If it declines from the current $500 million level, history suggests a potential 30% drawdown from $94 to $62.

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.

Bitcoin Technical Analysis: BTC Consolidation Points to Potential Shifts Ahead

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Bitcoin bulls plan to flip $23K to support by aiming to win this week’s $1B options expiry

BTC bulls are positioned to win this week’s $1 billion options expiry, but the market's post-FOMC reaction could alter their plans.

Bitcoin's (BTC) price has been trading above $22,500 for 12 days. Of course, this situation can change even if Federal Reserve chair Jerome Powell issues positive statements about the economy in today’s post-FOMC presser. 

Even if the decision matches the market consensus, the post-meeting statement should be investors' primary area of focus. Specific areas to focus on would be clues for the next meeting in March.

Troubling news for the largest stablecoin Tether (USDT), could also cause a meaningful impact after a Celsius bankruptcy examiner report showed that "Tether's exposure eventually grew to over $2 billion" in Sep. 2021. However, it is unclear if iFinex — Tether’s issuer — suffered any losses. iFinex CTO Paolo Ardoino denied exposure to Celsius and suggested that the examiner had "mixed up" prepositions in the report.

Is a strong correction in stock market ahead?

Legendary portfolio manager Michael Burry, known for being one of the most vocal critics of the subprime mortgage crisis in 2007 to 2008, posted a short note on Twitter on Feb. 1, suggesting that investors "sell."

While the message lacks a supporting thesis, one could conclude that Burry expects a meaningful correction in traditional markets. Considering the 40-day correlation between Bitcoin and the S&P 500 index at 75%, the odds of a BTC price retrace become evident.

Consequently, this week's Feb. 3, $1 billion BTC options expiry can go either way because bears can still flip the tables as the tide currently favors the bulls.

Bitcoin bears were caught entirely off-guard

The open interest for the Feb. 3 options expiry is $1 billion, but the actual figure will be lower since bears were caught by surprise after the 9.6% rally between Jan. 20 and Jan. 21.

Bitcoin options aggregate open interest for Feb. 3. Source: Coinglass

The 1.61 call-to-put ratio reflects the imbalance between the $640 million call (buy) open interest and the $400 million put (sell) options.

If Bitcoin price remains above $23,000 at 8:00 am UTC on Feb. 3, less than $7 million worth of these put (sell) options will be available. This difference happens because the right to sell Bitcoin at $22,000 or $23,000 is useless if BTC trades above that level on expiry.

Related: Retail giant Pick n Pay to accept Bitcoin in 1,628 stores across South Africa

$23,000 Bitcoin would give bulls a $180 million profit

Below are the three most likely scenarios based on the current price action. The number of options contracts available on Feb.3 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

  • Between $21,000 and $22,000: 2,700 calls vs. 10,700 puts. The net result favors the put (bear) instruments by $165 million.
  • Between $22,000 and $23,000: 4,400 calls vs. 4,200 puts. The net result is balanced between call and put options.
  • Between $23,000 and $24,000: 7,800 calls vs. 100 puts. The net result favors the call (bull) instruments by $180 million.
  • Between $24,000 and $25,000: 12,400 calls vs. 0 puts. Bulls extend their gains to $300 million.

This crude estimate considers the call options used in bullish bets and the put options exclusively in neutral-to-bearish trades. Even so, this oversimplification disregards more complex investment strategies.

For example, a trader could have sold a call option, effectively gaining negative exposure to Bitcoin above a specific price, but unfortunately, there's no easy way to estimate this effect.

In essence, Bitcoin bears need to push the price below $22,000 on Feb. 3 to flip the tables and secure a $165 million profit. But, for now, bulls are well positioned to profit from the BTC weekly options expiry and use the proceeds to further defend the $23,000 support.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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.

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Bitcoin Technical Analysis: BTC Consolidation Points to Potential Shifts Ahead