Bitcoin Price Liquidation Risk Rises As BTC Struggles To Regain $18K

Bitcoin (BTC) price had a mixed reaction on December 9 after the November report on US producer prices showed a 7.4% increase compared to 2021. The data suggested that wholesale costs continued to rise and inflation may last longer than investors had previously thought . Oil prices also remain a focus for investors, with WTI crude hitting a new annual low of $71.10 on December 8.

The US dollar index (DXY), a measure of the greenback’s strength against a basket of top foreign currencies, maintained the 104.50 level, but the index traded at 104.10, a 5-month low on Dec. 4. This signals low confidence in the US central bank’s ability to curb inflation without causing a significant recession.

Trader gutsareon noted that the choppy activity saw leverage longs and shorts liquidated, but that was followed by a failed preliminary dump below $17,050.

#BTC

good study case

first late shorts were taken out on push..then late longs on flush…then longs again on the PPI number…then shorts again…then an “unusual” low with little or no change in OI

Roller coaster pic.twitter.com/Qju1eOuNMX

— Peter (@gutsareon) 9 December 2022

According to the analysis, the open interest stagnation on futures contracts indicated low confidence from bears.

Regulatory uncertainty could have played a key role in limiting Bitcoin’s upside. On December 8, the United States Securities and Exchange Commission (SEC) issued new guidance that could see publicly traded companies disclose their exposure to cryptoassets.

The SEC’s Division of Corporation Finance said the recent crisis in the crypto-asset industry has “caused widespread disruption” and that US companies may have disclosure obligations under federal securities laws to disclose whether these events may affect their business.

Let’s look at derivatives calculations to better understand how professional traders are positioned in today’s market conditions.

Bitcoin margin longs faced a drastic increase

Margin markets provide insight into how professional traders are positioned because it allows investors to borrow cryptocurrency to leverage their positions.

For example, one can increase exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only short the cryptocurrency when they are betting that the price will go down. Unlike futures contracts, the balance between margin longs and shorts is not always matched.

The chart above shows that OKX traders’ margin lending rate increased from December 4th to December 9th, signaling that professional traders increased their leverage even after several failed attempts to break above the $17,300 resistance.

Currently at 35, the metric favors stablecoin borrowing by a wide margin and indicates that shorts are not confident of building bearish leveraged positions.

Options traders remain risk averse

Traders should analyze options markets to understand whether Bitcoin will eventually succumb to the bearish news flow. 25% delta bias is a clear sign when arbitrage desks and market makers are overcharging for upside or downside protection.

The indicator compares similar call (buy) and put (sell) options and will turn positive when fear is prevalent because the protective put option premium is higher than risky call options.

In short, the skew will move above 10% if traders fear a Bitcoin price crash. On the other hand, generalized voltage reflects a negative bias of 10%.

As shown above, delta bias improved by 25% between December 4th and December 9th, showing options traders reduced their risk aversion to unexpected price dumps. However, at today’s 15%, the delta bias signals that investors are still fearful because market makers are less involved in providing downside protection.

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On the one hand, the lack of open interest rate increases as Bitcoin tested the intraday low on December 9th seems encouraging. Nevertheless, excessive use of margin indicates that buyers may be forced to reduce their positions during surprise downside moves.

The longer it takes for Bitcoin to recapture $18,000, the riskier it becomes for leverage margin longs. Traditional markets continue to play an important role in setting the trend, so a potential retest down to $16,000 cannot be ruled out.