Prime merchants are dealing with a serious resistance of $ 11.5,000 lengthy after the Bitcoin value spike
On October 7th, Cointelegraph reported that top crypto traders had maintained a bearish stance since mid-September, by which time the long-short ratio of Bitcoin (BTC) was at its lowest level in 10 weeks. All of that changed within hours once BTC broke the USD 11,000 resistance.
Whenever Bitcoin's volatility gets too low, it usually signals that traders have become too complacent. Of course there will be periods of range trading, but short-term unpredictability is the defining characteristic of Bitcoin.
For pro-traders, implied volatility is commonly referred to as the fear index as it measures the average premium paid in the options market. Any unexpected significant price movement (both negative and positive) leads to a sharp rise in the indicator.
Bitcoin's 3-month implied volatility. Source: Skew
Notice how the 3 month options recently hit their lowest level in seventeen months. This should not be interpreted as a risk free market as the 3 month volatility of the S&P 500 is currently 28%. That's not even half of Bitcoin's current 60%. Hence, a $ 500 daily candle should come as no surprise.
For the past two weeks, Bitcoin price has been trading in the $ 10,400-10,900 range and open positions on BTC futures have increased by $ 300 million. This shows that the dealers had increased their stakes even though it was a seemingly quiet time.
BTC / USD 3-hour chart. Source: TradingView
Regardless of the reason for the recent price movement, top traders rushed to cover their short positions. Meanwhile, the premium on futures contracts has remained modest, which signals room for a sustained rally.
The futures premium signals that everything is in order
A futures contract seller typically charges a price premium for regular cash exchanges. This situation occurs in every derivatives market and is not unique to crypto markets. In addition to the liquidity risk of the exchange, the seller postpones the settlement, so the price is higher.
Healthy markets tend to trade at an annualized premium of 5% to 15% called the base rate. On the flip side, futures are trading below the regular spot exchanges, indicating a short-term bearish sentiment.
Bitcoin 3-month futures on an annual basis. Source: Skew
As can be seen from the graph above, the last time BTC futures held a 15% premium was on August 18, and they have maintained a slightly positive rate since then. The rally on Friday was not enough to cause overuse, which reinforced the brief thesis explained earlier.
In order to better understand how traders position themselves when BTC tries to set $ 11,000 as the new support level, one should monitor the long-short ratio of the exchanges.
Top traders are 20% net long
Although every futures market is balanced between buyers (longs) and sellers (shorts), the positions of top traders may differ from a broader customer base.
By aggregating only the net positions of the top traders, it can be determined how bullish or bearish their bets are.
OKEx Top Trader BTC Long / Short Ratio. Source: OKEx
According to OKEx, the long-short ratio of top traders on the exchange on October 9th was 0.75. This number corresponds to a net short position of 25% and can be interpreted as bearish.
Over the next 24 hours, these traders not only closed their shorts, but also returned to a net long position of 25%. This is a good indicator of a reliable recovery as opposed to a simple scenario with short coverage.
Binance Top Trader BTC Long / Short Ratio. Source: Binance
Binance data shows a similar situation as the long-short ratio of top traders rose from 9% to 23% net long over the same period. It's worth noting that the methods will vary between exchanges. Hence, one should monitor changes instead of absolute numbers.
The above data suggests that top traders were in fact net shorting the recent BTC price surge. The futures premium was kept at a positive, healthy level, which leaves room for further leverage on the buyer side.
Rather than relying on a typical "Bart Simpson pattern", top traders have changed their stance and are now bullish, which supports the thesis of a bull run to $ 14,000.
In the future, traders might consider moving their positions according to data rather than speculating on how price movements may or may not trigger trend changes.
It doesn't matter if the volatility is related to Square's most recent Bitcoin acquisition at 4,709. When top traders become bullish, it is usually a signal that the trend in that direction is strengthening.
The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.