Academy Trading Ideas Article

Bitcoin Rally Comes to Quick End as Market Sentiment Remains Cautious — Futures Friday

2020.06.26 Robbie Liu

Futures Friday is a weekly review of quarterly Bitcoin futures on OKEx. 

This week saw Bitcoin (BTC) surging to a high of $9,945 on Monday after a long run within a narrow range. However, it could not sustain the gains and entered a downside move on Wednesday before hitting the week’s low of $9,011 in the early hours of Thursday morning. Currently, Bitcoin is running around $9,300, as per OKEx Quarterly Future (BTCUSD0925), dropping less than 1% from last Friday.

Market movements indicate that Bitcoin’s price is still correlated to U.S. stocks, and Wednesday’s decline was seen across both markets. Meanwhile, repeated rejections of the $10,000 level have kept Bitcoin traders on edge around this price range.

On the technical front, buying volume did not pick up on Wednesday, indicating that any attempts at recovery were very weak. Technical bearish divergences on the Relative Strength Index were also visible on the hourly chart before the price pulled back to the $9,000 level. 

Looking at the OKEx trading data, the Long/Short Ratio reflects bearish market sentiment, while the BTC Basis — currently standing at $80 — indicates traders are still somewhat optimistic about midterm price movements.

OKEx BTC Quarterly Futures (BTCUSD0925) 1h chart. Source: OKEx

OKEx Trading Data Readings

Visit OKEx trading data page to explore more indicators 

BTC Long/Short Ratio

The BTC Long/Short Ratio dropped to 0.88 right before the price rally on Monday, indicating that a drop below 0.9 can be considered a reversal signal as in current market conditions. However, the ratio barely surpassed 1.0 when the price stood over $9,600, hinting at a cautious approach adopted by market participants. Currently, the ratio is running around 0.98, showing a short-term balance in sentiment.

Data Collection Time: 6/19 4:00 am to 6/26 4:00 am (UTC)

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. This means the total number of long positions must be equal to the total number of short positions. When the ratio is below 1, it indicates that more people are holding shorts, and vice versa.

BTC Basis

The quarterly future (BTCUSD0925) premium was running at around $70 last Friday and went as high as $130 before Wednesday’s pullback. Right now, the BTC Basis sits around $80, which indicates that some traders remain optimistic toward the medium-term price. 

However, the higher contango level in the week may attract a lot of arbitrage funds to open short positions, which could make upward moves more challenging.

Data Collection Time: 6/19 4:00 am to 6/26 4:00 am (UTC)

This indicator shows the quarterly futures price, spot index price, and also the basis difference between them. 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.

Open Interest and Trading Volume

Bitcoin showed lackluster price movements before the rally early this week, and this was reflected in the Open Interest. The OI had remained largely unchanged prior to the price surge and climbed quickly from 5.8 million contracts (1 contract = $100) to 6.7 million contracts on Tuesday. The accumulation was in line with the price movement, indicating that bulls opened long positions.

After Wednesday’s sudden drop, however, the OI has decreased to 6.35 million contracts, but it is still much higher than last week. Meanwhile, the price is facing some uncertainty going into the weekend, especially as more than $1 billion worth of options expire today

Data Collection Time: 6/19 4:00 am to 6/26 4:00 am (UTC)

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 OI will be 2,000. If the trading volume surges and the OI decreases in a short period of time, this may indicate that a lot of positions are closed, or were forced to liquidate. If both the trading volume and OI increase, it indicates that a lot of new positions have been opened.

BTC Margin Lending Ratio

The Margin Lending Ratio moved closely synced with the price over the week — suggesting that spot market participants were trading in response to price action — hitting a weekly high on Wednesday morning in Asia, when price topped at $9,800 and then fell quickly to the current level of 1.4 as the price dropped. 

Data Collection Time: 6/19 4:00 am to 6/26 4:00 am (UTC)

The Margin Lending Ratio is spot market trading data showing the ratio between users borrowing USDT versus those borrowing BTC in USDT value over a given period of time. 

This ratio also helps traders assess market sentiment. Generally, those 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.

Trader Insight

Robbie, OKEx Investment Analyst

After losing the support at $9,650, Bitcoin’s price has continued to show weakness. Right now, the price is running below the 60-day moving average, which could act as a resistance level for any potential rebounds. On the lower side, $9,000 is the key support to watch. 

RJ, Derivatives Trader

Over the last few weeks, we see that each time the futures delta approaches zero, the market finds itself in an oversold situation and bounces back up. This can be very logically explained, as futures represent market sentiment and backwardation or dips in contango show fear, while growing contango shows overconfidence or even euphoria. 

Following the investing-101 rule, markets peak on euphoric sentiment and rally on fear. When BTC rallied to $9,800 this week, the futures contango increased to a new high of 138 basis points, which was the highest since the $10,000 top (168 pts). That was already a clear signal that longs were too eager and the push was likely to get faded. 

Since then, the contango fell back to the 40-point range before recovering to around 80 points, which is still relatively healthy, but it could decrease again or even go in backwardation for a short while — that would be a good indication for fear in the market and a possible rebound to follow.

Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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