Bitcoin’s Dive Below $27K Liquidates $100M — So Why Aren’t Margin Traders Bearish?

Bitcoin’s (BTC) price broke below its 55-day support at $27,000 on May 12. As a result, the two-day, 7% correction to $26,155 saw $100 million worth of long BTC futures liquidated.

However, Bitcoin margins and futures markets showed strength during the downturn, fueling hopes of a rally towards $28,000.

Regulatory pressure, stronger US dollar bite

Regulatory uncertainty in the US increased significantly after Bitcoin miner Marathon Digital received yet another subpoena. The publicly traded mining company informed investors on May 10 that it received a subpoena from the US Securities and Exchange Commission (SEC) over whether it may have violated federal securities laws, including by using related party transactions.

In addition, there is the added risk of the 627,522 Bitcoins held by the Grayscale GBTC Trust Fund, which has been trading at a deep discount for over a year while Grayscale’s holding company, Digital Currency Group (DCG), struggles with some failing subsidiaries. DCG’s crypto lending and trading firm, Genesis Capital, filed for Chapter 11 bankruptcy protection in January.

Despite having separate company structures, Genesis Capital had “intercompany obligations” with the holding company DCG, so the consequences for the administration of the Grayscale funds are unknown. In addition, the group owes Gemini’s customers about $900 million, and the US SEC charged Genesis and Gemini in January.

Bitcoin’s 7.2% correction occurred as the Dollar Strength Index (DXY), which measures the US currency against a basket of foreign currencies, showed strength. The indicator hit 101 on May 8, nearing a 12-month low, a sign of low confidence in the government’s ability to curb inflation while managing to raise the debt limit.

Historically, there has been an inverse correlation between the DXY index and risk-based assets such as Bitcoin, given that a weaker dollar tends to drive demand for alternative stores of value and scarce assets.

Let’s look at derivatives calculations to better understand how professional traders are positioned in the current market environment.

Bitcoin margin market traders slightly less optimistic

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

OKX, for example, provides a margin lending indicator based on the stablecoin/BTC ratio. Traders can increase their exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only bet on the decline in the cryptocurrency’s price.

The chart above shows that OKX traders’ margin lending ratio decreased between May 8th and May 11th. Still, it’s not worrisome, given that these traders still favor bullish strategies as stablecoin demand (long) currently outpaces BTC demand (short) by a factor of 18 times – which is healthy.

Related: Texas Votes to Add Crypto to State Bill of Rights

No signs of panic selling after Bitcoin price crash

To rule out externalities that may have solely affected the margin markets, traders should analyze the long-to-short value. The calculation collects data from exchange customers’ positions on spot, perpetual and quarterly futures contracts, and thus provides better information on how pro-traders are positioned.

There are occasional methodological discrepancies between different exchanges, so readers should monitor changes rather than absolute numbers.

Although Bitcoin broke below the $28,000 support, professional traders have increased their leveraged long positions using futures, according to the long-to-short indicator.

On the OKX crypto exchange, the long-to-short ratio increased, from 0.92 on May 8 to 1.01 on May 12. Meanwhile, at Binance, the long-to-short ratio stabilized at 1.13, indicating that there was no shift to a bearish position from whales and market makers.

Despite the 12% price decline from a high of $29,865 on May 6, traders using margin and futures contracts did not abandon their bullish stance. The move indicates confidence that Bitcoin is more likely to regain $28,000 than succumb to the next support level near $24,500.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.