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Bitcoin Derivatives Futures Friday OKX Insights Trading

Retail bulls go big on longs as BTC slides below $40K

2022.01.21 Hunain Naseer

Retail traders are back to longing BTC aggressively as it falls below 40,000 USDT.

In the last edition of Futures Friday, we discussed how retail bulls were losing confidence in BTC’s bullish reversal as it continued to face resistance around 43,500 USDT levels. Since then, the market leader has dropped sharply below 40,000 USDT and is currently trading around 39,000 USDT, per the OKX BTC/USDT price.

From a technical perspective, bulls have been unable to stage any sustainable rally and continue to seek a strong bottom. Meanwhile, bears have opened the door to further price slides and tests of lower areas after yet again breaching 40,000 USDT.

In terms of futures contracts, the quarterly contract (BTCUSD0325) is now trading a mere $233 over the spot price, which is less than half of last Friday’s $500. The bi-quarterly contract (BTCUSD0624) also saw premiums slide and is now trading $840 over the spot price compared to $1,450 last week.

These continually lowering premiums are a sign of exhausted bullish sentiment in the market. However, extreme bearish values in premiums can be taken as signs of an upcoming bottom in the price that could restart an upward rally.

OKX BTC spot price on Jan. 21, with blue arrows marking recent Fridays. Source: OKX, TradingView

OKX trading data readings

Below, we take a look at several indicators to better understand market sentiment. You can visit OKX’s trading data page to explore more indicators.

BTC long/short ratio shows retail is back to longing BTC on this dip

The long/short ratio is an indicator of retail sentiment, and we noted last week how bulls had given up on aggressive longing. 

Today, however, with the price sliding sharply, bulls are back on track to longing BTC aggressively. In fact, at one point today, the ratio peaked around 2.30, which is the highest value seen in recent months.

However, this aggressive longing is seldom a bottom signal because, historically, retail longs are typically flushed before any real bottom starts forming.

BTC futures long/short ratio on OKX with markings highlighting values

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 reflects the growing bearish sentiment

The basis, or premium, for BTC futures contracts, reflects the market’s future projections. Due to Bitcoin’s recent price action, the basis values have seen declines week after week.

Today’s values are 50% or so down from last week’s, which reflects the growing bearish sentiment. However, historically, long-term price reversals are formed after premiums veer into negative territory.

BTC quarterly futures contract basis on OKX 

The BTC basis 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 remains stable

Open interest is not a bullish or bearish indicator in itself, but it shows participants’ interest in the market, especially during strong trends.

Over the last few weeks, we’ve highlighted the lack of any meaningful movement in OI — and that trend has persisted. 

Bulls will want to see the OI start building up as soon as BTC forms a potential bottom and starts rising again.

BTC futures open interest and volume on OKX with markings highlighting values

Open interest, or OI, is the value of 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 multiplied by the value of each underlying contract. 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.

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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.