Bitcoin Margin Long-Short Ratio at Bitfinex Hits All-Time High

September 12 will leave a mark that will likely remain for a long time. Traders on the Bitfinex exchange drastically reduced their leveraged Bitcoin (BTC) bearish bets and the lack of demand for shorts may have been caused by the expectation of fresh inflation data.

The bears may have lacked confidence, but August’s US Consumer Price Index (CPI) beat market expectations and they seem to be on the safe side. The inflation index, which tracks a broad basket of goods and services, rose 8.3% from a year earlier. More importantly, the energy price component fell 5% over the same period, but was more than offset by increases in food and housing costs.

Shortly after the release of worse-than-expected macro data, U.S. equity indices fell, with futures on the tech-heavy Nasdaq Composite Index slipping 3.6% in 30 minutes. Cryptocurrencies accompanied the deteriorating mood and the price of Bitcoin fell 5.7% over the same period, erasing the gains of the previous 3 days.

It would be naïve to identify the market slowdown with a single inflationary measure. Bank of America survey of global fund managers has 62% of respondents saying that a recession is likely, which is the highest estimate since May 2020. The research paper collected data the week of September 8 and was led by strategist Michael Hartnett.

Interestingly, while all of this is happening, Bitcoin margin traders have never been more optimistic, according to one metric.

Margin traders soared from bearish positions

Margin trading allows investors to leverage their positions by borrowing stablecoins and using the proceeds to buy more cryptocurrency. On the other hand, when these traders borrow Bitcoin, they are using the coins as collateral for shorts, which means they are betting on lower prices.

This is why some analysts monitor the total amount of Bitcoin and stablecoin lending to understand whether investors are bullish or bearish. Interestingly, Bitfinex margin traders entered their highest leveraged long/short ratio on September 12.

Bitfinex margin Bitcoin longs/shorts ratio. Source: Trading View

Bitfinex margin traders have been known to create position contracts of 20,000 BTC or more in a very short time, indicating the involvement of whales and large arbitrage bureaus.

As the chart above shows, on September 12, the number of BTC/USD long margin contracts exceeded short contracts by 86 times, at 104,000 BTC. For reference, the last time this indicator broke above 75, and favored long buying, was on November 9, 2021. Unfortunately, for the bulls, the outcome benefited the bears as Bitcoin plunged 18 % over the next 10 days.

Derivatives traders were too excited in November 2021

To understand how bullish or bearish professional traders position themselves, one must analyze the base rate of futures contracts. This indicator is also known as the futures premium and measures the difference between futures contracts and the current spot market in regular trading.

3-month Bitcoin futures base rate, November 2021. Source: Laevitas.ch

3-month futures typically trade at a 5% to 10% annualized premium, which is considered an opportunity cost for arbitrage trading. Notice how Bitcoin investors were paying excessive premiums for longs (buys) during the November 2021 rally, the complete opposite of the current situation.

On Sept. 12, Bitcoin futures were trading at a 1.2% premium to regular spot markets. Such a level below 2% has been the norm since August 15, leaving no doubt as to the lack of leveraged buying activity from traders.

Related: This week’s Ethereum merger could be the biggest change in crypto history

Possible Causes of Margin Lending Ratio Spike

Something must have caused Bitfinex short margin traders to reduce their positions, especially since the longs (bulls) remained flat in the 7 days leading up to September 12. The first likely cause is liquidations, meaning sellers had insufficient margin as Bitcoin gained 19% between September 6 and September 12.

Other catalysts may have led to an unusual imbalance between longs and shorts. For example, investors could have shifted collateral from Bitcoin margin trades to Ethereum, looking for leverage as the merger nears.

Finally, the bears could have decided to momentarily close their margin positions due to the volatility surrounding the US inflation data. Whatever the rationale for this move, there is no reason to believe that the market has suddenly become extremely optimistic, as the futures markets premium paints a very different scenario from November 2021.

Bears always have a half-full reading, as Bitfinex margin traders have the ability to add leveraged short (sell) positions. Meanwhile, bulls can celebrate the apparent lack of interest in betting prices below $20,000 from these whales.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

Sallie R. Loera