Bitcoin margin long-to-short ratio on Bitfinex reaches highest level ever

September 12 will leave a mark that is likely to stick around for quite some time. Traders on the Bitfinex exchange significantly reduced their leveraged bearish Bitcoin (BTC) bets, and the absence of demand for shorts could have been caused by the expectation of cool inflation data.

Bears may have lacked confidence, but August’s US consumer price index (CPI) came in higher than market expectations, and they appear to be on the right side. The inflation index, which tracks a broad basket of goods and services, increased by 8.3% compared to the previous year. More importantly, the energy price component fell 5% over the same period, but that was more than offset by increases in food and shelter costs.

Shortly after the worse-than-expected macroeconomic data was released, US stock indexes took a tumble, with the tech-heavy Nasdaq Composite Index futures falling 3.6% in 30 minutes. Cryptocurrencies followed the worsening sentiment, with the Bitcoin price falling 5.7% over the same period, erasing gains from the previous 3 days.

Pinpointing the market decline to a single inflationary value would be naive. A Bank of America survey of global fund managers had 62% of respondents saying a recession is likely, the highest estimate since May 2020. The research paper collected data from the week of September 8 and was led by strategist Michael Hartnett.

Interestingly, as all this is taking place, Bitcoin margin traders have never been more bullish, according to one calculation.

Margin traders flew away 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 a price decline.

That’s why some analysts monitor the total lending amounts of Bitcoin and stablecoins to understand whether investors are leaning bullish or bearish. Interestingly, Bitfinex margin traders entered their highest leverage long/short ratio on September 12th.

Bitfinex margin traders are known to create position contracts of 20,000 BTC or higher in a very short time, indicating the participation of whales and large arbitrage tables.

As the chart above indicates, on September 12, the number of BTC/USD long margin contracts exceeded shorts by 86 times, at 104,000 BTC. For reference, the last time this indicator turned above 75, favoring longs, was on November 9, 2021. Unfortunately for bulls, the result benefited bears, as Bitcoin reversed 18% over the next 10 days.

Derivatives traders were overly excited in November 2021

To understand how bullish or bearish professional traders are positioned, one should analyze the futures base rate. Also known as the futures premium, this indicator measures the difference between futures contracts and the current spot market on regular exchanges.

3-month futures typically trade at an annual premium of 5% to 10%, which is considered an opportunity cost of arbitrage trading. Note how Bitcoin investors paid excessive premiums for longs (buys) during the November 2021 rally, the opposite of today’s situation.

On September 12, Bitcoin futures contracts were trading at a 1.2% premium to regular spot markets. Such a sub-2% level has been the norm since August 15, leaving no doubt about traders’ lack of buying activity.

Related: This week’s Ethereum Merge may be the most important shift in crypto history

Possible reasons for the increase in the lending margin

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

Other catalysts may have led to an unusual imbalance between longs and shorts. For example, investors could have moved safety from Bitcoin margin trading to Ethereum, looking for some leverage as the merger approaches.

Finally, bears could have decided to temporarily close their margin positions due to the volatility surrounding the US inflation data. Regardless of the reasoning behind the move, there is no reason to believe that the market suddenly became extremely optimistic as the futures market premium paints a very different scenario from November 2021.

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

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