Margin trading allows an investor to borrow money or cryptocurrency to take advantage of their trading position and increase their size or expected return. For example, if you borrow Tether (USDT) you can buy Bitcoin (BTC), which increases the exposure. Although there is an interest rate associated with the borrowing, the trader expects the increase in the price of BTC to compensate for this.
Newer traders may not be aware of this, but investors can borrow BTC to get a short position in margin trading and take advantage of discounts. Because of this, some analysts monitor the total loan amounts of Bitcoin and Tether to get some insight into whether investors are bullish or bearish.
Interestingly, data shows that although the price of Bitcoin is targeting a new all-time high, the BTC / USDT loan ratio on OKEx has hit its lowest level since November 20, 2020. While that number still favors cops, it does raise questions about what catalysts are behind the move.
Whenever traders borrow USDT or other stable coins, they are likely using them to extend cryptocurrencies. On the other hand, BTC borrowing is mainly used for short positions.
This means that the market is theoretically bullish whenever the USDT / BTC credit ratio rises. The opposite move points to greater demand for bitcoin shorts.
As shown in the graph above, USDT loans on OKEx were around eight times higher than Bitcoin denominated loans. While this is bullish, it is almost the lowest level since November 17, 2020.
Lending rates for the bears have never been so low
In contrast to perpetual futures (inverse swaps), margin trades take place on regular spot markets. To start margin trading, a trader just needs to transfer collateral to a margin account. Most exchanges offer 3 to 10 times leverage depending on the volatility and market conditions of the asset.
This indicator has halved since the end of February, despite BTC making a new all-time high of $ 61,800 and closing the lingering daily candle above $ 55,000 for the past 17 days. Still, an increase in the bitcoin lending rate would undoubtedly cause BTC short positions to reduce their leverage.
According to Bitfinex, BTC’s short-term lending has dropped to 1% per year. So high costs are definitely not behind the much lower BTC borrowing. Although OKEx doesn’t provide a chart, both the Poloniex and Quoine exchanges showed a similar trend, according to Coinlend.
Bulls remained long despite the fee increase
Traders looking to see a negative price swing need to borrow BTC to get a short position in margin trading. Even in this situation, they still have to pay interest and trade it in US dollars or stablecoins. To complete the transaction, the buyer must buy back the BTC in hopes of a lower price and return it to the lender with the additional interest.
This time around, there was a massive spike in USD lending rates in mid-March when Bitcoin topped $ 60,000. The leveraged long frenzy quickly returned when BTC fell 13% in the days that followed, causing fiat and stablecoin loan rates to normalize.
Traders looking to borrow USD or stablecoins to buy Bitcoin have been paying between 15% and 23% per year for the past few weeks. This rate is probably why the OKEx USDT and BTC credit ratio is not increasing despite Bitcoin’s price strength.
Currently, the lending rate is favoring bulls
A meager annual fee of 1% was not enough to entice borrowers into selling Bitcoin, which is a positive indicator. If there had been a demand, the lending rate would have risen.
As a result, traders shouldn’t take it as a bearish signal that the OKEx margin credit ratio is at its lowest level in five months.
While a 23% margin rate is significantly expensive for longs, there is room for additional leverage. So it should come as no surprise that $ 60,000 is becoming a support level for Bitcoin.
The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph. Every step of investing and trading involves risk and you should conduct your own research when making a decision.