Bitcoin (BTC) has not been able to close above $ 32,000 in the last 28 days, frustrating bulls and pushing the Fear and Saint Index to bearish levels below 10. Even with the small increase since June 6, The Nasdaq tech-heavy stock index is down 24% year to date.
Investors who follow regulatory developments closely may have feared that New York State made it clear that it intends to regulate the cryptocurrency industry, including bitcoin mining.
On June 2, New York Attorney General Letitia James issued an investor warning against “dangerous investments in cryptocurrencies,” citing the volatility of these assets. According to Cointelegraph, the Attorney General is convinced that cryptocurrency investments create “more pain than happiness” for investors.
The New York State Senate approved a work-proof (PoW) mining ban on June 2 and the proposed controversial bill seeks to ban all new mining operations in the state for the next two years and he is going to the governor’s office now.
Interestingly, because all of this is happening, bitcoin derivatives traders have never been so optimistic, as one metric shows.
Margin traders are extremely optimistic
Margin trading allows investors to leverage their positions by borrowing stable coins and using the proceeds from that loan to buy other cryptocurrencies. When these wise traders borrow bitcoins, they use them as collateral for short positions, which means they are promised at lower prices.
This is why some analysts monitor the total loan volumes of bitcoins and stablecoins to see if investors are following higher or lower. Interestingly enough, Bitfinex margin traders took the highest long (bullish) position ever on June 6th.
Bitfinex margin traders were known to create standstill contracts of 20,000 BTC or more in a very short period of time, reflecting the involvement of whales and large arbitrage desks.
Note that the long (bullish) position indicator rose significantly in mid – May and currently sits at 90,090 BTC contracts, the all – time high. To understand the magnitude of this movement, we can compare it to the previous full-time high of June-July 2021, with 54,500 BTC contracts in a long position.
These traders hit the jackpot, as their bullish positions peaked just as the price of bitcoin was at the bottom. In the ensuing months, they were able to sell these long (bullish) contracts for a profit, reducing the number of long open positions (blue line).
Sometimes even whales are wrong
One would assume that these whales and arbitrage desks trading on Bitfinex margin markets have better timing (or better knowledge), and therefore it makes sense to follow in their footsteps. However, if we analyze the same metric for 2019 and 2020, a completely different scenario emerges.
The number of BTC long posts at Bitfinex has tripled this time around. The first case occurred between mid-November and mid-December 2019 after the indicator jumped from 25,200 BTC to 47,600 BTC in length. However, over the next month, the bitcoin price failed to break above $ 8,300 and these traders closed their positions with minimal gains.
The next wave of long positions in BTC occurred in early February 2020, but these traders were surprised when the price of bitcoin failed to clear the $ 10,500 mark, forcing them to close their margin positions with a significant loss.
Bitfinex BTC long positions increased from 22,100 to 35,700 contracts at the end of July 2020. The move coincided with the price rally to $ 47,000, so the early entrants were able to make some profit, but the most investors for their margin positions with no gain.
Smart long can be 75% correct, but there is a catch
To put it into perspective, in the last four cases where BTC’s long margin (bull) positions have increased significantly, investors have made one profitable trade, two that were largely neutral, and one significant loss.
Some might say that the odds are still in favor of those who follow the indicator, but it must be remembered that whales and arbitrage offices could easily crash the market when it comes time to close their positions. In such cases, those who follow the strategy may arrive late to the party and leave at a loss.
Will the current increase in Bitfinex margin long positions lead to huge profits? That may depend on how traditional markets, especially technology stocks, develop over the next few weeks.
The views and opinions expressed herein are those of the author and do not necessarily represent those of Cointelegraph. All investment and business transactions involve risk. You should do your own research before making a decision.