Biggest worry? Bitcoin futures leverage is being reset by this week's wild worth fluctuations
Leverage on the Bitcoin (BTC) futures market has dropped significantly in the past few days. This suggests that traders are generally unsure of where BTC is headed in the short term.
Estimated leverage on Binance. Source: CryptoQuant
What is leverage and why is this metric critical to sentiment in the Bitcoin market?
In the Bitcoin futures market, traders can borrow up to 125 times their initial capital to trade Bitcoin.
This enables traders to take massive Bitcoin positions, often much larger than the capital they have.
During the uptrend, traders tend to outbid their positions because they expect larger upward price movements. However, when the market becomes choppy and extremely volatile, traders become fearful.
When the leverage in the Bitcoin futures market drops, it simply means that traders are raising less capital to trade BTC. It shows a sign of fear that is likely to encourage traders to take safer positions with less risk of liquidation.
There are a few reasons why traders might be scared in this current market phase. First, Bitcoin rejected the $ 40,000 resistance level after $ 42,000. Second, the US dollar index (DXY) is rebounding. Third, the high sales pressure from Asia.
Filbfilb, a pseudonymous Bitcoin trader, called the January 16 sale a "High IQ Play". He noticed that the rise in the US dollar gave it momentum and traders continued to buy every dip.
As a result, the refinancing rate of the futures market rose steadily despite falling Bitcoin prices. Filbfilb wrote:
“Today's sell-off was a high IQ game. Embrace the dump, don't ignore the dump, you have to hug it. DXY gave momentum, cops bought it all the way down. They continued to sell, DXY created momentum, Tether FUD created fear, there was no fear of escaping USDT. Hug the dump. "
The trader also noted that selling pressure from Asia was high. Therefore, he stated that buy bids had to be fulfilled, which resulted in a correction. He said:
“The bids had to be filled, the garbage dump was close to Asia every day, its candle looked particularly bad, they threw more. straight into the hands of the smart cop. You can't stop the whale game with high IQ. Swim with whale or turn around and die. Hug the dump, it's always out there. "
A bullish reversal typically occurs after a major adjustment. Many traders were likely pulled out of positions in the recent correction as they fell below $ 36,000.
The refinancing rate of the Bitcoin futures market was also temporarily reset, suggesting that the number of long contracts has decreased significantly after the decline.
As the derivatives market cooled, the likelihood of an upside reversal has increased. In the short term, the central resistance area for Bitcoin remains $ 40,000, followed by $ 42,000.
Grayscale bonus. Source: Bybt.com
David Puell, a Bitcoin trader, also noted that the grayscale premium has increased, indicating an upward trend.