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Bitcoin futures market still optimistic after $3,000 Thanksgiving correction
Futures Friday is a weekly review of quarterly Bitcoin futures on OKEx.
Having risen for seven consecutive weeks, Bitcoin (BTC) experienced its first major correction just before the Thanksgiving holiday. In the afternoon on Nov. 25, the BTC price first hit a recent high of around $19,500, as per the OKEx BTC Index price, but then began a steep decline, losing important short-term and mid-term supports of $18,900 and $17,400 by the end of the day.
The massive drop triggered the largest daily liquidations in the derivatives market since March 12 — a total of $1.335 billion across major exchanges. All the traders who bought on the spot market in the last eight days have also been trapped.
While the BTC index currently stands at $16,800, the OKEx Quarterly Futures (BTCUSD1225) are trading around $17,050 levels with a premium of $250, or roughly 1.45%, over the index price.
In last week's Futures Friday article, we noted how the market was expecting a pullback and traders were bagging profits. But even though the price of BTC dropped $3,000 this week, the market's optimism appears to be far from crushed.
Both the BTC long/short ratio and the margin lending ratio have been trending higher, indicating retail bullishness. Moreover, CME's open interest is ahead of other exchanges for the first time after the correction, indicating that institutional investors are also betting on Bitcoin's future.
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BTC long/short ratio
BTC long/short ratio reached a recent high of 1.12 after the index price broke through $19,000 on Tuesday, and then it fell sharply to 0.95 within 24 hours, indicating that traders entered short positions to protect their profits.
Another observation is that when the price fell to $17,000 on Thursday, the long/short ratio suddenly rose to 1.12, reflecting retail traders' rush to buy the dip. As a result, the price briefly rebounded to $17,400 before a second pullback took it as low as $16,200.
The long/short ratio is still hovering around 0.95 — and when compared to its historical data over the past few weeks, this indicates that retail sentiment is still predominantly bullish.
The long/short ratio compares the total number of users opening long positions versus those opening short positions. The ratio is compiled from all futures and perpetual swaps, and the long/short side of a user is determined by their net position in BTC.
In the derivatives market, whenever a long position is opened, it is balanced by a short position. The total number of long positions must be equal to the total number of short positions. When the ratio is low, it indicates that more people are holding shorts.
The market's optimism is reflected in the premium of quarterly futures. After prices broke above $19,200 on Wednesday, the premium reached a recent high of $400, or 2%. With the December quarterly futures due to expire in less than a month, this premium is relatively very high.
However, excessive premium levels are also an indication of an impending market reversal. The BTC basis is now back at $250, or 1.4%, which is basically the same as last Friday, indicating that the market's optimism is still intact.
In addition, we observed on Wednesday that the BTC perpetual swap price was pushed up when the funding rate went above 0.1%. Considering 0.01% to 0.03% as a normal range for funding rates, Wednesday's figure shows that retail traders were chasing the price rally.
This indicator shows the quarterly futures price, spot index price and also the basis difference. The basis of a particular time equals the quarterly futures price minus the spot index price.
The price of futures reflects the traders’ expectations of the price of Bitcoin. When the basis is positive, it indicates that the market is bullish. When the basis is negative, it indicates that the market is bearish.
The basis of quarterly futures can better indicate the long-term market trend. When the basis is high (either positive or negative), it means there’s more room for arbitrage.
Open interest and trading volume
On Wednesday, open interest reached an all-time high of $1.3 billion. However, the huge price pullback that followed made the derivatives markets bleed, and OI dropped by $200 million in two days.
Currently, OKEx's OI of $1.1 billion has been surpassed by CME's $1.16 billion, as per skew's data, and this shows, to some extent, that institutional investors still hold confidence in the market, post-correction.
Open interest is the total number of outstanding futures/swaps that have not been closed on a given day.
Trading volume is the total trading volume of futures and perpetual swaps over a specific period of time.
If there are 2,000 long contracts and 2,000 short contracts opened, the open interest will be 2,000. If the trading volume surges and the open interest decreases in a short period of time, it may indicate that a lot of positions are closed, or were forced to liquidate. If both the trading volume and open interest increase, it indicates that a lot of positions have opened.
BTC margin lending ratio
The BTC margin lending ratio showed a gradual increase from last Friday's 8.0 to 10.6. The margin lending ratio continued to rise even when the price plummeted, indicating that retail traders believe the bottom is near.
The margin lending ratio is spot market trading data showing the ratio between users borrowing USDT versus borrowing BTC in USDT value over a given period of time.
This ratio also helps traders to look into market sentiment. Generally, traders borrowing USDT aim to buy BTC, and those borrowing BTC aim to short it.
When the margin lending ratio is high, it indicates that the market is bullish. When it is low, it indicates that the market is bearish. Extreme values of this ratio have historically indicated trend reversals.
Robbie, OKEx Investment Analyst
The price of BTC may enter a consolidation phase in the short-term due to Thursday's $3,000 correction. The previous trading zone from the second week of November — i.e., $15,800 to $16,400 — will provide some support for BTC. On the other hand, last week's mid-term support of $17,400 has flipped to resistance.
If the price cannot break out of the $17,400 to $17,600 range soon, the market may grow weak, especially as whales are reportedly depositing large sums of BTC on exchanges again. However, in the midterm, market participants — both institutional and retail — appear to remain confident, as highlighted above.
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