Big Bitcoin liquidations mean one man's pain is another man's pleasure – is it time to buy from the Bottom?

Big Bitcoin liquidations mean one man’s pain is another man’s pleasure – is it time to buy from the Bottom?

Bitcoin (BTC) has failed to restore $24,000 support since Celsius, a popular staking and lending platform, stopped withdrawals from its platform on June 13. Rumors of the Terra (LUNA; now LUNC) ecosystem and its bankruptcy continue to circulate.

An even bigger problem arose on June 14 after crypto venture capital firm Three Arrows Capital (3AC) reported. He lost $31.4 million by trading on Bitfinex. Also, 3AC was a known investor in Terra, which had a 100% collapse at the end of May.

Unconfirmed reports that 3AC is facing liquidations totaling hundreds of millions from multiple positions moved the market in the early hours of June 15, causing Bitcoin to trade at $20,060, its lowest level since December 15, 2020.

Let’s take a look at the available derivatives metrics to see if the June 15 bearish trend reflects the sentiment of top traders.

Margin markets are leveraged after a short long-term rise

Margin trading allows investors to borrow cryptocurrency and potentially leverage their trading positions to increase returns. For example, cryptocurrencies can be purchased by borrowing Tether (USDT) to increase risk.

On the other hand, Bitcoin borrowers can expose the cryptocurrency if they bet on the price drop, and unlike futures contracts, the balance between long-term and short-term collateral is not always matched. That’s why analysts watch lending markets to determine whether investors are bullish or bearish.

Interestingly, margin traders took their leverage long (bullish) positions to a two-month high on June 14.

Bitfinex margin Bitcoin/USD long/short rate. Source: TradingView

Bitfinex margin traders are known for creating position contracts of 20,000 BTC or higher in a very short time, which indicates the involvement of whales and large arbitrage tables.

As the chart above shows, even on June 14, the number of BTC/USD long margin contracts fell 49 times at 107,500 BTC. For reference, this indicator was below 10, last March 14 in favor of the longs. The result benefited counter traders at the time, as Bitcoin rose 28% in the following two weeks.

Bitcoin futures data shows professional traders getting liquidated

The top traders’ long-to-short net ratio does not include externalities that may have affected margin instruments. By analyzing these whale positions on spot, perpetual and futures contracts, we can better understand whether professional traders are bullish or bearish.

Top traders of exchanges Bitcoin long-short ratio. Source: Coinglass

It’s important to note the methodological differences between different exchanges, so absolute numbers matter less. For example, Huobi traders kept their long-short rates relatively unchanged from June 13 to July 15, while professional traders on Binance and OKX cut their long positions.

This move could represent liquidations, meaning the collateral deposit was insufficient to cover their longs. In these cases, the exchange’s automatic leverage reduction mechanism happens by selling the Bitcoin position to reduce the risk. In both cases, the long-short ratio is affected, indicating a less bullish net position.

Liquidations can represent a buying opportunity

Data from derivatives markets, including margin and futures, shows that professional traders certainly do not expect such a deep and sustained price correction.

Despite a high correlation with the stock market and the S&P 500 index reporting 21.6% losses to date, professional crypto traders did not expect Bitcoin to drop another 37% in June.

While leverage allows the person to maximize gains, it can also force gradual liquidations, such as the recent events seen this week. The automated trading systems of exchanges and DeFi platforms will sell investors’ positions at any price when the collateral is not enough to cover the risk, which puts heavy pressure on the spot markets.

These liquidations sometimes make an excellent entry point for those who are savvy and brave enough to trade extreme corrections due to the lack of liquidity and the lack of quotes on trading platforms. Whether this is the final bottom is something that will be impossible to determine until a few months after this volatility has passed.

The views and opinions expressed herein are solely author and may not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should do your own research when making a decision.

Leave a Comment

Your email address will not be published.