Retail traders have continued to long BTC during the recent price drop, despite no signs of trend reversal
In the last edition of Futures Friday, we highlighted Bitcoin’s rally ahead of Christmas as a profit-taking opportunity for retail traders. Those who sold the rally at the time ended up making the right trade as BTC failed to cross 52,000 USDT and has since dropped around 20% to levels below 41,000 USDT, per the OKEx BTC/USDT price.
From a technical perspective, bulls are looking for BTC to respect the 40,000 USDT level as a key support. On the other hand, bears want to break that down so that they can test the 37,000 to 38,000 USDT range.
In terms of futures contracts, the quarterly contract — BTCUSD0325 — is trading $642 higher than spot, but this premium is less than half of what it was during the end of December. Meanwhile, the bi-quarterly contract — BTCUSD0624 — is trading $1,600 over spot, which is also lower than the end of December premiums of around $2,500.
These lowered basis values reflect the market’s waning enthusiasm for a massive recovery in the short- to mid-term. However, the fact that these values are still positive means bullish expectations, though mild, are still intact as BTC trades around 42,300 USDT at the time of writing.
OKEx trading data readings
Below, we take a look at several indicators to better understand market sentiment. You can visit OKEx’s trading data page to explore more indicators.
BTC long/short ratio shows aggressive retail interest
The long/short ratio is an indicator of retail sentiment and we can see that it has been trending upward since the end of December. The formation of higher lows here shows retail’s aggressive interest in longing BTC as it continues to drop, presumably in a bid to catch a potential bottom around these price ranges.
The ratio has come from 0.88 on Dec. 21 to above 2.0 this week. The current value, at 1.93, is on the higher end when compared to historical data and is reflective of potentially overheated conditions.
Given how retail traders are seldom on the right side of the market, this aggressive bottom chasing may result in a price flush to test the bulls’ conviction.
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 remains muted
The basis, or premium, for BTC futures contracts reflects the market’s future projections. Given the recent price action, these values are, as expected, quite tame and show a lack of short- to mid-term optimism.
However, the fact that these values are positive means that bulls haven’t given up on the current cycle and are still expecting a recovery sometime in the future. Market participants may want to keep an eye out for these premiums entering negative figures during a market flush since such scenarios often precede strong price reversals.
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 shows market indecision
Open interest is not a bullish or bearish indicator in itself, but shows participants’ interest in the market, especially during strong trends. The fact that OI values have not moved much since December reflects market indecision.
Bulls looking for a market reversal from the current price range will want to see the OI moving up alongside any rally, as was the case in October. Until that happens, any price surge is unlikely to be sustained.
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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Source: https://www.okex.com/academy/en/retail-traders-chase-btc-bottom-bitcoin-futures-friday/