Why did 12K Bitcoin margin longs close on Bitfinex and why didn’t it affect the BTC price?

Since May 2022, the Bitcoin (BTC) margin markets on the Bitfinex exchange have been plagued by an unusually high open interest of over $2.7 billion. This information alone should raise a red flag, especially considering Bitcoin’s price drop from $39,000 to less than $25,000 over the same period.

Traders looking to leverage their cryptocurrency position had borrowed over 105,000 Bitcoin. Currently, the reason for this anomaly and the number of units involved in the trade are unknown.

Cheap loans favor high demand

Bitfinex’s annual interest rate of less than 0.1% may contribute to the size of the Bitcoin lending market. To date, this has been the norm, creating huge incentives to borrow, even if there is no need at the moment. Few traders would turn down such a ridiculously cheap exploitation opportunity.

Margin loans can be used to take advantage of arbitrage opportunities, where a trader takes advantage of price differences between different markets. For example, borrowing Bitcoin on margin allows a trader to take a long position in one market and a short in another, and profit from the price difference.

To understand how Bitcoin loans can be used to profit from derivatives markets, including those outside of Bitfinex, one must understand the distinction between futures contracts and margin markets. The margin is not a derivative contract, so the trade takes place on the same order book as spot trading. Additionally, unlike futures, margin longs and shorts do not always balance.

For example, after buying 10 Bitcoin using margin, the coins can be withdrawn from the exchange. Naturally, trading, typically based on stablecoins, requires some form of collateral or a margin deposit.

If the borrower fails to return the position, the exchange will liquidate the margin to repay the lender.

In addition, the borrower must pay interest on BTC acquired with a margin. The operational procedures vary between centralized and decentralized exchanges, but the lender usually determines the interest rate and duration of the offers.

It was a 12,000 BTC margin drop in a single trade

Historically, Bitfinex margin traders have been known to move large margin positions quickly, indicating the participation of whales and large arbitrage tables. In the most recent case, on March 25, these investors reduced their long positions by 12,000 BTC in minutes.

Note the significant decline, although it did not affect the Bitcoin price. This supports the theory that such margin trades are market neutral because the borrower does not leverage their positions with the proceeds. Most likely there is some arbitrage involving derivative instruments.

Traders should cross-reference the data with other exchanges to confirm that the anomaly affects the entire market, given that each exchange has different risks, norms, liquidity and availability.

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

The chart above shows that OKX traders’ margin-lending ratio has been stable over the past week near 30, indicating that professional traders’ long-to-short plays have not changed. This data supports the theory that Bitfinex’s decline is due to an arbitrage unrelated to the Bitcoin price movement.

Related: US authorities plan to sell 41K Bitcoin linked to Silk Road

Recent crypto bank shutdowns could have sparked the move

Another possibility for the sudden drop in margin demand is the $4 billion in deposits linked to the now-defunct Signature Bank. Crypto customers were told to close their accounts by April, according to a Bloomberg report.

While New York Community Bancorp (NYCB) acquired the majority of Signature Bank’s deposits and loans on March 19, the deal with the Federal Deposit Insurance Corporation did not include crypto-related accounts.

If these whales are forced to close their bank accounts, they will most likely reduce their arbitrage positions, including those in the margin markets. For now, all assumptions are speculative, but one thing is certain: 12,000 BTC long margin reduction at Bitfinex did not affect Bitcoin prices.