Bitcoin Price Liquidation Risk Rises as BTC Struggles to Recover $18,000

Bitcoin Price Liquidation Risk Rises as BTC Struggles to Recover $18,000

The price of Bitcoin (BTC) had a mixed reaction on Dec. 9 after the November U.S. producer price report showed a 7.4% increase from 2021. The data suggests that the wholesale costs have continued to rise and inflation may last longer than investors previously believed. Oil prices are also still the focus of investors’ minds, with WTI crude hitting a new yearly low of $71.10 on December 8.

The US Dollar Index (DXY), a measure of the dollar’s strength against a basket of major foreign currencies, held the 104.50 level, but the index traded at 104.10, a 5-month low on December 4. This signals low confidence in the ability of the US Federal Reserve to rein in inflation without causing a significant recession.

Trader gutsareon noted that the choppy activity led to the liquidation of leveraged longs and shorts, but was followed by a failed interim dump below $17,050.

According to the analysis, stagnating futures open interest indicates low bear confidence.

Regulatory uncertainty could have played a key role in limiting Bitcoin’s rise. On December 8, the United States Securities and Exchange Commission (SEC) issued new guidelines that may require publicly traded companies to disclose their exposure to crypto assets.

The SEC’s Corporate Finance Division said the recent crisis in the crypto asset industry has “caused widespread disruption” and that US companies may have disclosure obligations under federal securities laws to disclose whether these events could have an impact on their business.

Let’s look at derivatives metrics to better understand how professional traders are positioning themselves under current market conditions.

Bitcoin margin faced a drastic increase

Margin markets provide insight into the position of professional traders, as they allow investors to borrow cryptocurrency to leverage their positions.

For example, one can increase exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only sell the cryptocurrency because they are betting on its price falling. Unlike futures contracts, the balance between long and short margins is not always equal.

OKX stablecoin/BTC margin lending ratio. Source: OKX

The chart above shows that OKX traders’ margin lending ratio increased from December 4 to December 9, signaling that professional traders increased their leverage even after several failed attempts to break above the $17,300 resistance.

Currently at 35, the metric favors stable borrowing by a wide margin and indicates that shorts are not confident about building bearish leveraged positions.

Options traders remain cautious

Traders should analyze the options markets to understand if Bitcoin will eventually succumb to the bearish news flow. The 25% delta skew is a telltale sign whenever arbitrage desks and market makers overcharge for upside or downside protection.

The indicator compares similar call (call) and put (sell) options and turns positive when fear prevails, because the protection premium of put options is higher than that of risky call options.

In short, the bias measure will jump above 10% if traders fear a Bitcoin price crash. In contrast, generalized excitement reflects a negative bias of 10%.

Bitcoin options 60 days 25% delta skew: Source: Laevitas

As shown above, the 25% delta skew improved between December 4 and 9, showing that options traders have reduced their risk aversion for unexpected price declines. However, at the current level of 15%, the delta skew signals that investors remain fearful as market makers are less included in the offer of downside protection.

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On the one hand, the lack of open interest increases as Bitcoin tested the intraday low on Dec. 9 looks encouraging. Nevertheless, excessive use of margin indicates that buyers may be forced to reduce their positions during surprise bearish moves.

The longer it takes Bitcoin to recover $18,000, the riskier it becomes for long leverage margins. Traditional markets continue to play a vital role in setting the trend, so a potential retest up to $16,000 cannot be ruled out.