Bitcoin (BTC) lost 25.4% in 48 hours to $15,590 on Nov. 9, as investors rushed to exit their positions after the second-largest cryptocurrency exchange, FTX, stopped withdrawing money. More importantly, levels below $17,000 were last seen nearly two years ago, and the fear of contagion was evident.
The move wiped out $285 million worth of long (bull) leverage positions and led some traders to predict a potential downside of $13,800.
How exciting to live! Loving the volatility created by these elites! They really want to buy low before the next bull period! Thank goodness we were prepared months ago!
— JD (@jaydee_757) November 14, 2022
As described by independent market analyst jaydee_757, the bearish trend continues to exert pressure with $17,200 as a resistance level. Again, such an analysis does not guarantee that the final bottom of $13,800 will be hit.
Interestingly, the price action coincided with improving conditions for global equity markets on October 4, as the S&P 500 rose 6.4% between November 10 and November 11, and the tech-heavy Nasdaq Composite rose 9.5% . So, at least technically, Bitcoin is completely separated from traditional finance.
Grayscale Bitcoin Trust (GBTC) trading on over-the-counter (OTC) stock markets has sparked further uncertainty about Bitcoin after the $11.4 billion fund discounted its assets by more than 40%.
Monitor GBTC liquidity and lenders’ exposure to said product for contagion risk
looks like someone is selling a lot of GBTC
the discount is now >40% and widening, the implied BTC price is $9K and a lot of GBTC is sitting in toxic places.
— Vance Spencer (@pythianism) November 11, 2022
As Vance Spencer points out, the implied BTC price is below $9,000 as funds trade, and pressure should continue if some holders use their shares as collateral for loans.
Still, the negative sentiment that drove Bitcoin below $20,000 doesn’t mean professional investors are bearish at current price levels.
Margin traders did not close their longs
Monitoring margin and options markets provide excellent information on how professional traders are positioned, allowing investors to borrow cryptocurrency to leverage their trading positions.
For example, you can increase your exposure by borrowing stablecoins to buy an additional Bitcoin position. On the other hand, Bitcoin borrowers can only use the cryptocurrency for a short period of time because they are betting that the price of the cryptocurrency will fall. Unlike futures contracts, the balance between margin longs and shorts does not always match.
The chart above shows that the margin lending ratio of OKX traders increased from November 8 to 10, indicating that traders did not close their leverage lengths despite the 25.4% price correction.
Additionally, the metric continues to favor stablecoin borrowing by a wide margin, indicating that traders are maintaining bullish positions.
Options markets have turned bearish
Traders should scan the options markets to see if Bitcoin can retake the $18,500 support. A 25% delta skew is a telltale sign when arbitrage tables and market makers are overloaded for upside or downside protection.
The indicator compares similar call (buy) and put (sell) options and will turn positive when fear prevails because protective put options have a higher premium than risky call options.
If traders fear that Bitcoin prices will fall, the tilt indicator will move above 10%. On the other hand, generalized excitation reflects a negative 10% skewness.
As shown above, the 25% delta skew has been below 10% since October 26th, but it quickly crossed that threshold on November 8th, indicating that options traders are overestimating the risk of unexpected price declines.
Any time this metric is above 10%, it indicates that traders are fearful and reflects an interest in offering downside protection.
Related: Crypto.com’s CRO is in trouble, but a 50% price increase is in play
Dismissing FUD doesn’t happen overnight
Despite the bearish Bitcoin options indicator, the OKX margin lending rate showed whales and market makers hedging their bullish bets. Fear of contagion may explain the mixed sentiment as investors struggle to interpret the recent actions of the Crypto.com exchange, including the “accidental” transfer of 320,000 Ether (ETH) to Gate.io.
Run on Crypto com starts after FTX crashes. Investors began pulling funds from the Singapore-based cryptocurrency exchange, pointing to FTX’s dramatic collapse as a contagion between exchanges. Cronos, the founder of the crypto com business, has sunk. https://t.co/evk4J1vnnL pic.twitter.com/wMJmvch2D0
— Holger Zschaepitz (@Schuldensuehner) November 14, 2022
Analyst Holger Zschaepitz’s post describes the current investor sentiment as a reluctance to take risks on centralized exchanges that offer similar products and services from the now-bankrupt FTX.
As a result, derivatives reflect low confidence to recover the $18,500 support until the cryptocurrency ecosystem shows liquidity is restored.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading action involves risk, you should do your own research when making a decision.