The price of Bitcoin (BTC) has tested the $16,000 resistance several times since the 25% crash that took place between Nov. . correction.
It annoys me a bit that bitcoin is still selling for $16K even after all this FTX news. I mean, I’m assuming the volume is low, but what the hell would it take to properly crush this zombie “currency” to its rightful value of near zero?
— Daniel Knowles (@dlknowles) November 18, 2022
For example, Daniel Knowles, a correspondent for The Economist, says the world’s 26th most traded asset, with a market capitalization of $322 billion, is “remarkably useless and wasteful.” Knowles also said that “there is still no rationale for Bitcoin. It’s a pure ponzi.”
If you think about it, for outsiders, the price of Bitcoin is the most important indicator of success, regardless of its valuation, surpassing secular companies such as Nestle (NESN.SW), Bank of America (BAC) and Coca-Cola (KO).
The need for most people to centrally manage their money is so ingrained that the success and failure rates of cryptocurrency exchanges become the gatekeeper and benchmark of success, when in fact just the opposite is true. Bitcoin was created as a peer-to-peer money transfer network, so exchanges are not synonymous with adoption.
It is worth emphasizing that Bitcoin has been trying to break above $17,000 for the past seven days, so buyers above that level are certainly lacking appetite. The most likely reason is that investors fear a contagion risk similar to that seen with Genesis Block, the latest FTX-related victim that terminated service due to liquidity issues. According to recent reports, the company has announced plans to stop trading and close operations.
The price of bitcoin is stuck in a downtrend and will be hard to shake, but it would be a mistake to assume that the failure of the centralized cryptocurrency exchange is the main cause of bitcoin’s downtrend or a reflection of its actual value.
Let’s take a look at the crypto derivatives data to see if investors remain risk averse on bitcoin.
Futures markets are in backwardation, and this is a bearish trend
Fixed-month futures contracts typically trade at a small premium to regular spot markets because sellers demand more money to hold settlement longer. This situation, technically known as contango, is not unique to crypto assets.
In healthy markets, futures should trade at an annual premium of between 4% and 8%, which is enough to offset the risks plus the cost of capital.
Considering the data above, it is clear that derivatives traders turned bearish on Nov. 9 as the Bitcoin futures premium went into backwardation, meaning that demand for short positions – bearish bets – is extremely high. This data reflects the reluctance of professional traders to add leveraged long (bullish) positions despite the inverted value.
The ratio of long and short positions shows a more balanced situation.
In order to rule out external factors that could only affect the quarterly contracts, traders should analyze the ratio of long and short positions of leading traders. It collects data on the positions of the exchange’s clients on the spot, perpetual futures contracts and fixed calendar futures contracts, thus better informing the position of professional traders.
There are methodological discrepancies between the various exchanges from time to time, so readers should follow changes rather than absolute numbers.
Even though Bitcoin failed to clear the $17,000 resistance on November 18, professional traders increased their long positions slightly in line with the long-short indicator. For example, the Huobi traders ratio has improved from 0.93 on November 16 and is currently at 0.99.
Connected: The aftermath of Crypto Biz, FTX leaves behind blood
Similarly, OKX saw a modest increase in the long/short ratio as the indicator moved from 1.00 to the current 1.04 in two days. Finally, on the Binance exchange, the indicator did not change around 1.00. Thus, such data shows that traders did not become bearish after the last resistance was abandoned.
Therefore, it should not be concluded that futures backwardation, given the broader analysis of the long-to-short ratio, does not show signs of excessive bearish demand from whales and market makers.
It will likely be some time before investors rule out potential regulatory and contagion risks caused by the downfall of FTX and Alameda Research. Until then, a sharp recovery in bitcoin seems unlikely in the short term.
The views and opinions expressed here are solely those of the author and do not necessarily reflect those of Cointelegraph.com. Every investment and trading step involves risk, you should do your own research when making a decision.