In the last 24-hours Bitcoin (BTC) price dropped 14% and tested the $32,000 support for the fifth time this year. Traders probably became even more worried as the price fell to $31,050 but at the time of writing the 4-hour chart suggests that the selling could be slowing down.
Currently the shorter-term charts indicate that Bitcoin is still flirting with bearish territory but a number of derivatives indicators and the top traders flow reflect neutral to bullish levels.
The last three times Bitcoin price fell below $32,000, an extensive rally of up to 30% followed. Data shows that the top traders at OKEx have been heavily buying the dip and the futures premium has held in an optimistic range.
Even though traders are buying this current dip, the sharp $4,200 drop did inflict serious damage on some investors. The move down to $31,270 was followed by $460 million in liquidations at derivatives exchanges. Interestingly, this occurred just as the open interest on BTC futures reached a $13.1 billion all-time high.
Today's price action might seem worrisome, but it pales in comparison to the Jan.10 24% crash that wiped out $1.5 billion in long contracts.
Veteran traders are more accustomed to Bitcoin's 120% annualized volatility so a 12% price swing isn’t particularly frightening. In fact, top traders and arbitrage deks remained relatively calm during the dip.
To understand whether or not Bitcoin is flashing bearish signals, traders can analyze top traders' long-to-short ratio at crypto exchages, the futures premium, and the options skew.
OKEx longs are 2.5 times larger than shorts
Exchange-provided data highlights traders' long-to-short net positioning. By analyzing every client's position on the spot, perpetual and futures contracts, one can obtain a clearer view of whether professional traders are leaning bullish or bearish.
With this said, there are occasional discrepancies in the methodologies between different exchanges, so viewers should monitor changes instead of absolute figures.
OKEx top traders have been adding long positions since Jan. 19, driving the indicator from 0.96 (slightly net short) to a 2.49 ratio which favors longs. This is the highest level in 30 days and indicates an unusually extreme imbalance.
On the other hand, top traders at Huobi averaged a 0.91 long-to-short ratio over the last 30 days, favoring net shorts by 9%. On Jan. 20, they added net short positions down to a 0.86 ratio but repurchased them as BTC plunged during the early hours of Jan. 21. Thus, they are back to their monthly average of 0.91 long-to-short.
Lastly, Binance top traders averaged a 21% position that favored longs over the past 30 days. These traders seem to be getting liquidated as their net longs were cut to 1.02 from 1.18 since late Jan. 20. According to data from Coinalyze, 40% of total BTC long liquidations over the past 24 hours took place at Binance.
The futures premium spiked
Professional traders tend to dominate longer-term futures contracts with set expiry dates. By measuring the expense gap between futures and the regular spot market, a trader can gauge the level of bullishness in the market.
The 3-month futures should usually trade with a 6% to 20% annualized premium (basis) versus regular spot exchanges. Whenever this indicator fades or turns negative, this is an alarming red flag. This situation is known as backwardation and indicates that the market is turning bearish.
On the other hand, a sustainable basis above 20% signals excessive leverage from buyers, creating the potential for massive liquidations and eventual market crashes.
The above chart shows that the indicator ranged from 3.5% to 5.5% since Dec. 13, translating to a moderately bullish 19% annualized basis. Meanwhile, the recent 6.5% peak is equal to a 29% annualized premium, indicating excessive buyers leverage.
Although this is not the exact reason for today’s correction, market makers and arbitrage desks know precisely how to play this situation. Pushing the price down would certainly trigger a vast amount of liquidations and it should also be noted that the futures open interest had just reached an all-time high.
Currently, the BTC March contracts premium has stabilized near 2.5%, equivalent to a healthy 14% annualized basis.
20% crashes are the norm rather than the exception
It's important to consider that Bitcoin holds a 60 day volatility of 4.2%. Therefore, these large corrections should be expected.
Bitcoin faced a 20% crash and tested sub-$28,000 levels on Jan. 4, and this was followed by a 27% intraday decline on Jan. 11. For those brave enough to buy each of these dips, a recovery of up to 30% followed less than four days later.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.