Crypto Twitter says bitcoin shorts are increasing, but the data shows otherwise


Margin trading allows investors to borrow stablecoins or cryptocurrencies to take advantage of their position and improve the expected return. For example, if you borrow Tether (USDT), you can buy Bitcoin (BTC) and thus increase your Bitcoin long position.

Investors can also borrow BTC to trade a short position as margin and bet on price losses. For this reason, some analysts monitor the total loan amounts of Bitcoin and Tether to gain insight into whether investors are trending bullish or bearish.

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Are analysts freaking bearish just because of Bitfinex’s margin data?

This week, some prominent analysts cited an increase in Bitcoin short positions on Bitfinex, which peaked at 6,621 BTC on June 7th.

However, when analyzing a broader range of data – including margin longs, the funding rate of perpetual contracts, and protective put options – there is no evidence that prominent players are preparing for a surprisingly negative move.

A single instance of bitcoin margin shorts preceding the negative price spike should not be viewed as a leading indicator. Additionally, one has to consider bitcoin margin longs – an opposing, usually larger, force.

Bitfinex margin Bitcoin / USD longs / shorts ratio. Source: TradingView

As the graph above shows, the number of BTC / USD long margin contracts even outpaced short positions by 3.6 at 39,000 BTC on May 17th. In fact, this indicator last fell below 2.0 on November 26, 2020, favoring long positions. The result wasn’t good for the shorts as Bitcoin rose 64% over the next 30 days.

OKEx USDT / BTC credit ratio. Source: OKEx

Whenever traders borrow tether and stablecoins, they are likely to be long on cryptocurrencies. On the other hand, BTC borrowing is mainly used for short positions.

In theory, the market is bullish whenever the USDT / BTC credit ratio rises. The ratio at OKEx bottomed at 3.5 on May 20, favoring long positions, but quickly returned to the 5.5 level. Hence there is no evidence of any significant move in favor of shorts in the margin markets.

The funding rate for perpetual futures is still unchanged

Perpetual futures prices trade very close to regular spot exchanges, making the lives of retailers a lot easier by eliminating the need to calculate the futures premium.

This magic can only be achieved through the funding rate charged by longs (buyers) when they demand more leverage. However, if the situation is reversed and short sellers (sellers) are too heavily indebted, the funding rate becomes negative and they pay the fee.

Bitcoin Perpetual Futures 8-hour funding rate. Source: Bybt

As shown above, the funding rate has been largely unchanged since May 19th. Had there been a massive spike in short sale demand, the indicator would have reflected the move.

The options put-to-call ratio remains bullish

The call option (buy) offers your buyer upside protection, and the put option (sell) does the opposite. This means that traders seeking neutral to bearish strategies tend to rely on put options. On the other hand, call options are more commonly used for bullish positions.

Aggregated Bitcoin Put-to-Call Option Ratio. Source: CryptoRank

Note that the neutral to bullish call options outperform the protective puts by almost 90%. Had professional traders and whales expected a market crash, this ratio would have been positively influenced.

Investors should not make trading decisions based on a single indicator as the remaining markets and exchanges may not confirm this. At the moment there is absolutely no evidence that strong players are shorting Bitcoin.

The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement carries risks. You should do your own research when making a decision.