Bitcoin’s drop to $56,000 may have been the local bottom

    22 Nov 2021

    After a fantastic price run hit a new all-time high of over $69,000 on November 10, Bitcoin’s price to drop to $55,705 just 9 days later. Though, Marcel Pechman sees 3 reasons why that significant drop may have been the local bottom.

    Bitcoin has been on a fantastic price run since the announcement of the United States Securities and Exchange Commission’s approval of ProShares’ Bitcoin futures exchange-traded fund (ETF) early in October, hitting a new all-time high of over $69,000 on November 10, as per data from TradingView.

    Further, the financial watchdogs soured the mood by rejecting VanEck’s proposal for a spot ETF on November 12, which acted as a trigger for the flagship cryptocurrency’s price to drop to a 30-day low of $55,705 on November 19.

    However, Marcel Pechman suggested on Cointelegraph that Bitcoin’s huge drop may have been the local bottom. The absence of cascading liquidations, 25% delta skew, and the margin lending ratio suggest that Bitcoin’s price bottomed at $56,500.

    In just the past year alone, there have been five instances of 20% or higher daily gains, as well as five intraday 18% drawdowns. Truth to be told, the volatility of the past 3-months has been relatively modest compared to recent peaks. Although shocking to many is the fact that the current 19% correction from the $69,000 all-time high on November 10 took place over nine days.

    (Source: TradingView )

    At first, Marcel Pechman noted that cryptocurrency traders are well-known for high-leverage trading; and in just the past 4 days, nearly $600 million worth of long (buy) Bitcoin futures contracts were liquidated. That might sound like a decent enough number, but it represents less than 2% of the total BTC futures markets.

    Pechman said that the first evidence that the 19% drop down to $56,000 marked a local bottom is the lack of a significant liquidation event despite the sharp price move. He suggested that had there been excessive buyers’ leverage at play, a sign of an unhealthy market, and the open interest would have shown an abrupt change, similar to the one seen on Sept. 7.

    (Source: )

    Further, to determine how worried professional traders are, Pechman suggested analyzing the 25% delta skew. As he said, this indicator provides a reliable view into “fear and greed” sentiment by comparing similar call (buy) and put (sell) options side by side.

    If this metric will turn positive, then the neutral-to-bearish put options premium is higher than similar-risk call options – this indicates a “fear” scenario. The opposite trend signals “greed” – a bullish trend.

    As values between negative 7% and positive 7% are deemed neutral, so Pechman pointed that nothing out of the ordinary happened during the recent $56,000 support test. This indicator would have spiked above 10% had pro traders and arbitrage traders detected higher risks of a market collapse. So the options markets’ risk gauge remained calm, the expert stated.

    (Source: )

    Finally, Marcel Pechman pointed that margin traders are still going long. Margin trading allows investors to borrow cryptocurrency to leverage their trading position, therefore increasing the returns. For example, one can buy cryptocurrencies by borrowing Tether (USDT) and increasing their exposure. On the other hand, the experts said that Bitcoin borrowers could only short it as they bet on the price decrease.

    Unlike futures contracts, the balance between margin longs and shorts isn’t always matched, Pechman noted. So, the below chart shows that traders have been borrowing more USDT recently, as the ratio increased from 7 on November 10 to the current 13. The data leans bullish because the indicator favors stablecoin borrowing by 13 times, so this could be reflecting their positive exposure to Bitcoin price, Pechman said.

    (Source: OKEx )

    According to Pechman, all of the above indicators show resilience in the face of the recent BTC price drop. He concluded that anything could happen in crypto, but derivatives data hints that $56,000 was the local bottom.

    Leave a Reply

    Your email address will not be published. Required fields are marked *