The risk of bitcoin price liquidation is increasing!

The risk of bitcoin price liquidation is increasing!

The price of bitcoin (BTC) had a mixed reaction on December 9 after the US producer price report for November increased 7.4% from 2021. The data suggested that wholesale trade costs continued to rise and that inflation may be longer than thought previous investors. Oil prices also remain the focus of investors’ minds, with WTI crude hitting an annual low of $71.10 on December 8.

The US Dollar Index (DXY), a measure of the dollar’s strength against a basket of major foreign currencies, supported the 104.50 level, but the index traded at 104.10, a 5-month low on December 4. This reflects low confidence in the US Federal Reserve’s ability to contain inflation without a major recession.

Trader gutsareon noted that leveraged long and short positions were liquidated by the choppy action, but then a tentative pullback below $17,050 failed.

#BTC, good case study, first the late shorts were liquidated on the push…then the late longs on the push…then the longs again on the PPI numbers release…then short positions again.. .then an ‘unusual’ bottom with little change in the IO. Rollercoaster– Peter (@gutsareon) December 9, 2022

According to the analysis, the stagnation in open interest futures showed a weak bearing confidence.

Regulatory uncertainty may have played a key role in limiting bitcoin’s rise. On December 8, the United States Securities and Exchange Commission (SEC) issued new guidance that could see publicly traded companies disclose their crypto assets.

The SEC’s Division of Corporate Finance said the recent crisis in the crypto asset industry has “caused widespread disruption” and that US corporations may have disclosure obligations under federal securities laws, to indicate whether the events may have an impact here are their activities.

Let’s look at derivatives metrics to better understand how professional traders are positioned in current market conditions.

Bitcoin long margin positions have increased significantly

Margin markets provide insight into how professional traders are positioned, as they allow investors to borrow cryptocurrencies to increase their positions.

For example, one can increase exposure by borrowing stables to buy bitcoins. In contrast, bitcoin lenders can only short the cryptocurrency, betting on its price falling. Unlike futures contracts, the balance between margin lending and short selling is not always respected.

OKX stablecoin/BTC margin lending ratio. Source: OKX

The chart above shows that the margin lending ratio for traders on OKX increased from December 4-9, indicating that professional traders increased their leveraged long positions, even after multiple failed attempts to break through resistance at $17,300.

Currently at 35, the metric favors stablecoin lending by a wide margin, and shows that sellers are not confident in taking bearish leveraged positions.

Options traders remain risk averse

Traders should analyze the options markets to understand if bitcoin will finally succumb to the bearish news flow. The 25% delta skew is a telltale sign when arbitrageurs and market makers cut protection up or down.

The indicator compares similar call and put options and turns positive when fear is widespread, as the premium for protective put options is higher than for risky calls.

In short, the skew metric will go above 10% if traders fear a bitcoin price crash. On the other hand, generalized excitement shows a negative skew of 10%.

25% skewed delta of 60-day options on bitcoin: Source: Laevitas

As shown above, the 25% delta skew improved between December 4 and December 9, indicating that options traders have reduced their risk exposure for unexpected price drops. However, at the current level of 15%, the delta skew shows that investors remain fearful as market makers have included less in the bid for downside protection.

Also read: US regulator seeks information on DeFi impact on financial crime

On the one hand, the lack of an increase in open interest when bitcoin tested the intraday low on December 9 looks very encouraging. However, excessive margin use indicates that buyers may be forced to reduce their positions in the event of a surprise drop.

The longer it takes bitcoin to get back to $18,000, the more dangerous the leveraged margin positions will be. Traditional markets continue to play a vital role in defining the trend, so a possible retracement up to $16,000 cannot be ruled out.

The views, ideas and opinions expressed herein are solely those of their authors and do not necessarily reflect those of Cointelegraph.

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