Bitcoin leverage rises as BTC’s margin-long-to-short ratio hits record high of $2.5 billion
Crypto traders’ urge to create leveraged positions with Bitcoin (BTC) seems irresistible to many people, but it is impossible to know whether these traders are extreme risk takers or savvy market makers hedging their positions. The need to maintain hedges applies even if traders rely on leverage simply to reduce their counterparty exposure by maintaining a margin and the bulk of their position on cold wallets.
Not all influence is reckless
Regardless of the reason for traders’ use of leverage, there is currently a highly unusual imbalance in the margin lending markets that favors BTC longs betting on a price increase. Despite this, so far, movement has been limited on margin markets because BTC futures markets remained relatively calm through 2023.
Margin markets operate differently from futures contracts in two main areas. These are not derivative contracts, which means that the trade takes place on the same order book as regular spot trading, and unlike futures contracts, the balance between margin longs and shorts is not always matched.
For example, after buying 20 Bitcoin on margin, one can literally withdraw the coins from the exchange. Of course, there must be some form of collateral, or a margin deposit, for the trade, and this is usually based on stablecoins. If the borrower fails to return the position, the exchange will automatically liquidate the margin to repay the lender.
The borrower must also pay an interest rate for BTC purchased on margin. The operational procedures will vary between marketplaces held by centralized and decentralized exchanges, but usually the lender gets to decide the rate and duration of the offers.
Margin traders can be either long or short
Margin trading allows investors to leverage their positions by borrowing stablecoins and using the proceeds to buy more cryptocurrency. When these traders borrow Bitcoin, they are using the coins as collateral for short positions, meaning they are betting on a price decline.
That’s why analysts monitor the total lending amounts of Bitcoin and stablecoins to understand whether investors are leaning bullish or bearish. Interestingly, Bitfinex margin traders entered their highest leverage long/short ratio on February 26th.
Historically, Bitfinex margin traders are known to create margin positions of 10,000 BTC or higher quickly, indicating the participation of whales and large arbitrage tables.
As the chart above indicates, on February 26, demand for BTC/USD long (bulls) margin exceeded shorts (bears) by 133 times, at 105,300 BTC. Prior to 2023, the last time this indicator reached an all-time high favoring longs was on September 12, 2022. Unfortunately, for bulls, the result went in favor of bears, as Bitcoin reversed 19% over the following six days.
Traders should cross-reference the data with other exchanges to ensure that the anomaly is market-wide, especially since each marketplace has different risks, norms, liquidity and availability.
OKX, for example, provides a margin lending indicator based on the stablecoin/BTC ratio. At OKX, traders can increase their exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only bet on the decline of a cryptocurrency’s price.
The chart above shows that OKX traders’ margin-lending ratios increased throughout February, signaling that professional traders added to leveraged long positions even as the Bitcoin price failed to break the $25,000 resistance multiple times between February 16th and February 23rd.
Furthermore, the margin ratio at OKX on 22 February was the highest level in over six months. This level is highly unusual and matches the trend seen at Bitfinex, where a strong imbalance favored Bitcoin margin lengths.
Related: Can Bitcoin Reach $25K Again in March 2023? Watch Market Talks live
The difference in the cost of influence may explain the imbalance
The rate of leveraged BTC longs at Bitfinex has been almost non-existent through 2023, and is currently below 0.1% per year. In short, traders should not panic, considering that the cost of margin lending remains in a zone considered healthy, and the imbalance is not present in the futures markets.
That could be a plausible explanation for the movement, which didn’t happen overnight. For example, one possible culprit is the rising costs of stablecoin lending.
Instead of the minimal price offered for Bitcoin loans, stablecoin borrowers pay 25% per year on Bitfinex. This cost increased significantly in November 2022 when the leading derivatives exchange FTX and their market maker Alameda Research exploded.
As long as the Bitcoin margin markets remain extremely unbalanced, traders should continue to monitor the data for further signs of stress. For now, no red flags are being raised, but the size of Bitfinex BTC/USD longs ($2.5 billion position) should be a cause for concern.
The views, thoughts and opinions expressed herein are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
