Bitcoin experienced significant volatility between April 25 and May 1, fluctuating between $27,200 and $30,000. While this 10.5% move may cause alarm from a trading perspective, resulting in $340 million in leveraged BTC futures contract liquidations, from a broader perspective, Bitcoin’s price is up 72% year-to-date in 2023, while the S&P 500 stock market index has gained 9%.
Bitcoin’s bull run occurred while the dollar strength index, which measures the U.S. currency against a basket of foreign exchanges, was nearing its lowest level in 12 months. The indicator now stands at 102, down from 105.3 eight weeks prior, as investors price in higher odds of further interventions from the United States Treasury to contain the banking crisis.
On May 1, First Republic Bank (FRB) became the latest U.S. bank to collapse in 2023, joining Silicon Valley Bank and Signature Bank. The upcoming Federal Reserve decision on interest rates on May 3 is causing Bitcoin investors to question the sustainability of the $28,000 support level. By pushing the rate return closer to 5%, the central bank removes incentives for risk markets investments, essentially being negative for the price of Bitcoin.
Professional Traders’ Positioning in the Market
Margin markets provide insight into how professional traders are positioned because they allow investors to borrow cryptocurrency to leverage their positions. OKX, for instance, provides a margin lending indicator based on the stablecoin/BTC ratio, where traders can increase their exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only bet on the decline of the cryptocurrency’s price.
The OKX traders’ margin lending ratio increased between April 17 and April 30, showing that leverage has been used to support the Bitcoin price gains. The 43% ratio favoring BTC longs on April 27 was the highest level in 40 days, indicating overexcitement as Bitcoin flirted with $30,000, which adjusted to 32% after the latest correction to $28,400.
To exclude externalities that might have solely impacted the margin markets, traders should analyze the long-to-short metric. The metric gathers data from exchange clients’ positions on the spot, perpetual, and quarterly futures contracts, thus offering better information on how pro traders are positioned.
Professional traders have increased their leveraged long positions using futures, according to the long-to-short indicator. At OKX, the long-to-short ratio sharply increased, from 0.66 on April 27 to 0.93 on May 1. Moreover, at Binance, the long-to-short ratio also increased, favoring longs, moving from 1.12 on April 25 to a 1.26 peak on April 30.
Therefore, despite the 5% price decline from a high of $29,970 on April 30, the bears using futures contracts were not confident enough to add leveraged shorts. Bulls should not yet throw in the towel, as both margin and futures market indicators remain healthy.