In the last 24 hours, the price of Bitcoin (BTC) has fallen by 14% and tested the support of $ 32,000 for the fifth time this year. Traders probably became even more concerned as the price dropped to $ 31,050, but at the time of writing, the 4-hour chart is suggesting that sales may slow down.
Currently, the shorter term charts indicate that Bitcoin is still flanked by a bearish area, but a number of derivative indicators and the best trader flows reflect neutral to bullish levels.
The last three times the Bitcoin price has dropped below $ 32,000, an extended rally of up to 30% has followed. Data show that the best traders at OKEx bought the decline strongly and that the futures premium remained optimistic.
Even though traders are buying this current drop, the sharp drop of $ 4,200 has caused some investors serious damage. The downgrade to $ 31,270 was followed by liquidations of $ 460 million on derivative exchanges. Interestingly, this happened just when public interest rates on BTC futures peaked at $ 13.1 billion.
Today’s price action may seem worrying, but it pales in comparison to the 10% crash on January 24 that wiped out $ 1.5 billion in long-term contracts.
Veteran traders are more accustomed to the 120% volatility of 120% on an annual basis, so the 12% price volatility is not particularly frightening. In fact, top traders and arbitrage coverage remained relatively calm during the dip.
To understand whether Bitcoin is flashing bearish signals or not, traders can analyze the long-to-short ratio of top traders on crypto exchange rates, the futures premium and the skewed options.
OKEx length is 2.5 times longer than shorts
Published data is highlighted by traders’ long to short net positioning. By analyzing the position of each client on the spot, perpetual and futures contracts, one can get a better picture of whether professional traders are clumsy or clumsy.
With that said, there are sometimes discrepancies in the methodologies between different exchanges, so viewers should monitor changes instead of absolute figures.
OKEx top traders have been adding long positions since January 19, raising the indicator from 0.96 (slightly net short) to a 2.49 ratio that is long. This is the highest level in 30 days and indicates an extraordinary extreme imbalance.
On the other hand, the best traders at Huobi averaged a long-to-short ratio of 0.91 over the past 30 days, which favored net shorts by 9%. On January 20, they added net short positions to a ratio of 0.86, but bought it back when BTC plunged in the early hours of January 21. So they are back on their monthly average of 0.91 to short.
Finally, Binance Top Traders achieved a position of 21% which has benefited over the past 30 days. These traders appear to be liquidating as their net extensions have been reduced from 1.18 to 1.02 since late January. According to data from Coinalyze, 40% of the total BTC-long liquidations have taken place at Binance in the last 24 hours.
The term premium has risen
Professional traders tend to dominate long-term futures contracts with set expiration dates. By measuring the cost gap between futures contracts and the regular spot market, a trader can measure the level of bullishness in the market.
The three-month futures contracts usually have to trade at a premium (basis) of 6% to 20% (basis) compared to ordinary spot exchanges. When this indicator fades or becomes negative, it is a disturbing red flag. This situation is known as decline and indicates that the market is becoming bearish.
On the other hand, a sustainable base of more than 20% indicates excessive leverage by buyers, creating the potential for massive liquidations and eventual market crashes.
The chart above shows that the indicator has fluctuated between 3.5% and 5.5% since December 13, which translated to a moderate bullish 19% basis. Meanwhile, the recent peak of 6.5% equates to an annualized premium of 29%, indicating excessive leverage buyers.
While this is not the exact reason for today’s correction, market makers and arbitrage agents know exactly how to handle this situation. If the price falls, it will certainly cause a large amount of liquidations, and it should also be noted that future interest rates have just peaked.
Currently, the premium for BTC contracts has stabilized at almost 2.5%, equivalent to a healthy annual basis of 14%.
20% accidents are the norm rather than the exception
It is important to note that Bitcoin has a 60-day volatility of 4.2%. Therefore, these major corrections must be expected.
Bitcoin had a 20% crash on January 4 and tested the levels below $ 28,000, followed by a 27% drop on the day on January 11th. For those brave enough to buy each of these declines, a recovery of up to 30% less than four days later was followed.
The views and opinions expressed here are only those of the outhor and does not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risk. You must do your own research when making a decision.