Bitcoin (BTC) has failed to close above $32,000 for the past 28 days, upsetting the bulls and pushing the Fear and Greed Index to bearish levels below 10 since the start of the year.
Investors closely following the development of the regulatory framework may have been spooked after the state of New York in the US made clear its intention to regulate the crypto industry, including bitcoin mining.
On June 2, New York Attorney General Letitia James warned investors about “risk investments in cryptocurrencies,” citing asset volatility. According to Cryptooshala, the Attorney General is convinced that investing in cryptocurrencies brings “more pain than benefits” to investors.
The New York State Senate approved a Proof of Work (PoW) mining ban on June 2, and a controversial proposed bill aims to ban any new mining operations in the state for the next two years and is currently being submitted to the Governor for consideration. .
Interestingly, since all of this is happening, Bitcoin derivatives traders have never been this bullish on one metric.
Margin traders are very optimistic
Margin trading allows investors to leverage their positions by borrowing stablecoins and using the proceeds to buy more cryptocurrencies. When these savvy traders borrow bitcoin, they use the coins as collateral for short positions, i.e. they bet on a price decline.
That’s why some analysts track the total loan amount in bitcoin and stablecoins to see if investors are bullish or bearish. Interestingly, on June 6, Bitfinex margin traders opened their long (bullish) position with the highest leverage ever.
Bitfinex margin traders are known to create position contracts of 20,000 BTC and above in a very short time, indicating the involvement of whales and large arbitrage tables.
Please note that the long position indicator (bullish) increased significantly in mid-May and is currently at 90,090 BTC contracts, the highest ever. To get an idea of how serious this move was, you can compare it to the previous June-July 2021 all-time high of 54,500 long BTC contracts.
These traders hit the bull’s-eye as their bullish positions peaked just as the price of bitcoin bottomed out. In subsequent months, they could sell these long (bullish) contracts for a profit by reducing the number of open long positions (blue line).
Sometimes even the whales are wrong
It can be assumed that these whales and arbitrage bureaus trading on Bitfinex’s margined markets have the best time (or knowledge) and so it makes sense to follow their steps. However, if we analyze the same metric for 2019 and 2020, we get a completely different scenario.
This time, the number of Bitfinex BTC margin longs has tripled. The first instance occurred between mid-November and mid-December 2019, when the indicator jumped from 25,200 BTC to 47,600 BTC longs. However, over the next month, the price of bitcoin failed to rise above $8,300 and these traders closed their positions for minimal profit.
The next wave of BTC longs occurred in early February 2020, but these traders were caught off guard after the price of Bitcoin failed to break $10,500, forcing them to close their margin positions at a significant loss.
Bitfinex BTC margin long positions increased from 22,100 contracts to 35,700 contracts at the end of July 2020. This move coincided with a rise in price to $47,000, so early entrants could make some profit, but most investors closed their margin long positions with no profit.
Smart margin longs may be correct 75% of the time, but there is a catch.
By comparison, in the previous four instances where BTC margin long positions (bulls) increased significantly, investors had 1 profitable trade, 2 mostly neutral trades, and 1 significant loss.
Some may say that the odds are still in favor of those who follow the indicator, but one must remember that whales and arbitrage tables can easily bring the market down when they close their positions. In such cases, those who follow the strategy may be late to the party and end up at a loss.
Will the current increase in Bitfinex margin longs lead to extreme profits? It may depend on how traditional markets, mainly tech stocks, perform over the next few weeks.
The views and opinions expressed here are solely those of author and do not necessarily represent the views of Cryptooshala. Every investment and trading move involves risk. You should do your own research when making a decision.
Credit : cointelegraph.com