Bitcoin Traders Increase Leverage Longs Even As Crypto Critics Say BTC Is ‘Pure Ponzi’

Bitcoin Traders Increase Leverage Longs Even As Crypto Critics Say BTC Is ‘Pure Ponzi’

Bitcoin (BTC) price has tested the $16,000 resistance several times since the 25% crash that occurred between November 7 and November 9, and some critics will justify their bearish bias by mistakenly assuming that the failure of FTX exchange should trigger a much broader correction.

For example, Daniel Knowles, a correspondent for The Economist, says that the 26th largest tradable asset in the world with a market value of $322 billion is “stunningly useless and wasteful”. Knowles also said that “there’s still no logical case for Bitcoin in particular. It’s pure ponzi.”

If you think about it, to outsiders, Bitcoin’s price is the single most important indicator of success, regardless of its valuation, which surpasses secular companies like Nestle ( NESN.SW ), Bank of America ( BAC ) and Coca-Cola ( KO ).

Most people’s need for centralized authority for their money is so entrenched that the success and failure of cryptocurrency exchanges becomes the gatekeeper and benchmark of success, when in fact it is the opposite. Bitcoin was created as a peer-to-peer money transfer network, so exchanges are not synonymous with adoption.

It is worth highlighting that Bitcoin has been trying to break above $17,000 for the past seven days, so there is certainly a lack of appetite from buyers above that level. The most likely reason is that investors fear contagion risk, similar to what was seen with Genesis Block, the latest FTX-related victim to halt service due to liquidity issues. According to recent reports, the company announced plans to cease trading and close operations.

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The Bitcoin price is stuck in a downward trend and it will be difficult to shake it, but it is a fallacy to assume that centralized cryptocurrency exchange failure is the primary cause of Bitcoin’s downward trend, or a reflection of its actual value.

Let’s look at crypto derivatives data to understand whether investors are still risk-averse to Bitcoin.

The futures markets are in decline, and this is bearish

Futures contracts with fixed months usually trade at a small premium to regular spot markets because sellers require more money to hold back settlement for longer. Technically known as contango, this situation is not exclusive to crypto assets.

In healthy markets, futures should trade at an annual premium of 4% to 8%, which is enough to compensate for the risk plus the cost of capital.

Bitcoin 2-month futures annual premium. Source: Laevitas.ch

Considering the data above, it is clear that derivatives traders have turned bearish on November 9, as the Bitcoin futures premium declined, meaning that demand for shorts – bearish bets – is extremely high. This data reflects the reluctance of professional traders to add to leveraged long (bull) positions despite the inverted cost.

The longs-to-shorts ratio shows a more balanced situation

To rule out externalities that may have solely influenced the quarterly contracts, traders should analyze the long-to-short ratios of the top traders. It collects data from exchange clients’ positions on spot, perpetual and fixed-calendar futures contracts, thereby providing better information on how professional traders are positioned.

There are occasional methodological discrepancies between different exchanges, so readers should monitor changes rather than absolute numbers.

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The exchange’s top traders Bitcoin long-to-short ratio. Source: Coinglass

Although Bitcoin failed to break the $17,000 resistance on November 18, professional traders slightly increased their long positions according to the long-to-short indicator. For example, Huobi traders’ ratio improved from 0.93 on November 16 and currently stands at 0.99.

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Similarly, OKX showed a modest increase in its long-to-short ratio, as the indicator moved from 1.00 to today’s 1.04 in two days. Finally, the metric was flat near 1.00 on the Binance exchange. Thus, such data shows that traders did not turn bearish after the latest resistance rejection.

Accordingly, one should not conclude that the futures reversal, given the broader analysis of the long-to-short ratio, shows no evidence of excessive bearish demand from whales and market makers.

It will likely take some time for investors to rule out potential regulatory and contagion risks caused by FTX and Alameda Research’s downfall. Until then, a sharp recovery for Bitcoin seems unlikely in the short term.