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Bitcoin Derivatives Futures Friday

Bitcoin futures indicate retail traders unsure about market direction despite new ATH

2020.12.04 Robbie Liu

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

Last Friday marked a reversal for Bitcoin (BTC) after its Thanksgiving correction, as the leading digital currency rose for three consecutive days and hit a new all-time high of $19,912 on Tuesday, as per the OKX BTC Index price. However, there was a sharp retreat of $1,800 shortly after, following which BTC began consolidating.

While the BTC index currently stands at $19,500, the OKX Quarterly Futures (BTCUSD1225) are trading around $19,700 levels and with a premium of $220, or roughly 1.14%, over the index price. 

In last week’s Futures Friday article, we noted that retail and institutional investors were all betting on Bitcoin’s bullishness — this was reflected in how the price reached a new high this week. However, $19,900 levels turned out to be challenging and the price was not able to test the critical $20,000 resistance since then.

This week, both the BTC long/short ratio and the margin lending ratio show that retail traders were trapped by the great price fluctuations — shorting before the price rebound and chasing the rally before a big pullback. However, in the second half of the week, several ratios returned to the intermediate levels, indicating that retail traders do not have a clear attitude toward the price trend.

OKX BTC Quarterly Futures (BTCUSD1225), as of 6:00 am UTC on Dec. 4. Source: OKX, TradingView

OKX trading data readings

Visit OKX trading data page to explore more indicators. 

BTC long/short ratio

The long/short ratio actually dropped during the price rally from late last weekend to Monday, falling from around 1.08 to as low as 0.78. This suggests that retail investors were caught unprepared for the rebound and were trapped as short-sellers.

The ratio then spiked when the BTC Index price broke through $19,000, rising from 0.78 to more than 1.0 in just six hours, indicating that retail investors were chasing the price rally at the time. However, the subsequent $1,800 pullback may have also caused these traders to be caught out of position.

As the price of Bitcoin continues to tease the psychological $20,000 mark, the tremendous volatility adds a new challenge for traders. Since Wednesday, the long/short ratio has fallen again and is currently running around 0.9. This figure is in the middle zone of the chart below and shows that market participants are largely unsure about the market’s future direction.

Data collection time: 11/27 6:00 am UTC to 12/4 6:00 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. 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.

BTC basis

During the price rally at the end of last week, the BTC basis between quarterly futures and index did not follow through. Combined with the fact that negative funding rates on the BTC perpetual swap occurred during the time,  it can be concluded that retail investors did not benefit from the rally.

After the index price entered $19,000 levels, there was a sudden spike in BTC basis and funding rates — BTC basis jumped from $200 to $300 levels while funding rates spiked to above 0.2%. This indicates that retail investors were chasing the price increase with high leverage, which explains the subsequent $1,800 crash. Most of the time, the market destroys traders with high leverage. 

Right now, BTC basis and funding rates are back to their normal levels of $200 and below 0.3%. The price movements corresponding to the fluctuations of these two indicators last week may be very useful for subsequent trading.

Data collection time: 11/27 6:00 am UTC to 12/4 6:00 am UTC

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

Open interest was $1.1 billion last Friday, and rose to a weekly high of $1.37 billion before Bitcoin’s price reached an all-time high on Tuesday. After the subsequent price volatility, the current open interest remains at $1.26 billion, indicating that the market is still highly active.

Moreover, the $1.26 billion in OI also ranked the first among all derivatives exchanges as per skew’s data. OKX is followed by CME, with an open interest of $1.14 billion. 

Data collection time: 11/27 6:00 am UTC to 12/4 6:00 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 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 has remained consistent with the long/short ratio over the past seven days. The ratio is now back around 11.0, which is similar to last Friday’s level. This intermediate level does not provide us with much information to judge price short-term developments, but the 11.0 levels are also in the top range if we look back at the last three months, suggesting that the spot leveraged market is still confident about the future.

Data collection time: 11/27 6:00 am UTC to 12/4 6:00 am UTC

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.

Trader insight

Robbie, OKX Investment Analyst

Since the price is still running high above $19,000, whales may take advantage of high liquidity to market dump this price range. The $19,500 to $20,000 range, as per the index price, has also become a difficult level to break in the near term. Ultimately, we are likely to witness a battle between the whales and retail traders as Bitcoin tries to test the key psychological level of $20,000.

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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.