Dichotomy Of Sentiments, How To Pick A Side?
Case Study into Bitcoins on-chain analysis (Part #4)
This story is the last part of the case study I have been writing; check out the previous ones…
Part#1: On-chain Was Revealing, How Smart Money Works?
Part#2: How I Kept My Sanity In The May Time Panic?
Part#3: Cyclicity Of Panics, How To Time Crashes?
Before diving deep into analysis, I want to clarify a few terms first as they are important for a deeper understanding of the system.
Open Interests(O/I)
It is the total value of open positions on an exchange, now this position can be a long or a short. What it tells the amount of leverage that exists in the market.
Funding Rate
It’s the difference between Perpetual Futures(futures that don’t have an expiry) markets and spot prices. When it is positive, there are net longs on the market, and when negative, there are net shorts in the market.
Now, this does not mean a negative funding rate means the market is bear, what it means is the leveraged market participants are more inclined towards a certain direction, that being bearish if the funding rate is negative.
It is better to have a low funding rate for a better price action devoid of any sudden pullbacks.
So funding rates tell us how far the derivative market is extended from the spot price and open interest tell us how much of present price action is caused by leverage, thus giving us an idea about the sustainability of future price action and the strength of a bull or bear run i.e the longevity of it.
In the last article, I showed my observation of how price tends to bottom out at exactly 17:30 IST, which is also when the New York session goes live. It is a well-known fact that Asian session is usually bearish relative to western sessions, but the precision of the timing was something which shocked me and also build my confidence about using it for timed entry.
July 18, 2021 to July 24, 2021
It finally happened!
As I explained in my previous article that I saw a dip to the 29k range and how I was prepared to time it too. While taking entries around the 29k spot, my short-term indicators were bearish, only the 15min ones. So I kept patient till the price reached above 30k support, and while it was around 31.5k to 32k, my medium turn indicators gave another entry, and man, was I surprised with the move.
This move reminded me of an unprecedented move that happened on 19th May, and like then, there are many similarities between them.
There was a massive and sudden drop in the open interests, i.e the number of open orders. This is an indication of many people being liquidated at the same time.
Clearly, the derivative traders were short squeezed out of the market. This is an important observation I made, that for someone to make money in these markets, there must be someone losing it. With big money players who have entered the markets, it is mostly the unskilled masses who are used to socialize the losses upon.
The difference between both the squeezes was that people were shorting bitcoin in this one whereas, on May 19, they were on the long side.
On 19th May, the funding rate was net positive i.e derivatives market bullish, whereas, in this squeeze, it was net negative i.e derivatives market was bearish.
Another major difference is in the type of collateral used for leverage.
This shows the percentage of traders who were using crypto assets as collateral to gain leverage for their trades, which has declined sharply since the all-time high.
Whereas the number of people using stable coins as collateral has increased substantially.
I suspect 2 reasons for this sudden shift in mindset from crypto margined to cash margined.
First, when you put up crypto as collateral and buy in a position, you are well to do if the market moves up as then both your collateral and your position gain. But let’s just say the market turns bear and both start to lose worth, in such a case depending upon the amount of leverage, your position will close and wipe you out, and after a certain spot price, your collateral might get sold to mitigate the counterparty risk.
Was a whopping 31% drawdown in the BTC collateralized open interests after the 19th May panic sell-off? So to protect themselves from future black-swan liquidation events, the derivative traders started shifting to stable coin collaterals to preserve the value of their collateral and not get margined out.
Second, there has been an increase in the open interests, as shown below.
This rise in open interest is in line with the increase in stable coin-margined open interests whereas crypto-margined OIs have reduced significantly, all this with an increasingly negative funding rate suggested that people were using stable coin-margined as they are bearish about the market.
Until recently when they turned bullish, along with which we can see a rise in crypto-margined open interests.
With this, it might be the case that a rise in cash-margined OIs suggests a bearish path in the market, where a rise in crypto-margined OIs suggests a bullish run in the market from a derivative trader point of view.
You need to understand that such overextended scenarios are when the market goes against the majority of participants, and you too can benefit from it by betting against it.
Do you know it’s a bull market?
Looking at the success of such precise entries and massive movements does make me happy, but at the same time, there have been people who have lost greatly in these times.
People try to play big on the small fluctuations in the markets, forgetting that big money was not in the individual fluctuations but the main movement.
It does not become a bear market because the market has taken the time and has not moved as yet. The market does not beat them. They beat themselves because though they have brains, they cannot sit tight.
For me, I don’t think one can catch all the fluctuations. So in a bull market, your game is to buy and hold until you believe that the bull market is near its ends, depending upon the time frames you want to play in. That said, it is always wise to keep 15–20% of that asset even at your exit in case you miss out on the next foreseen fluctuation.
You have to use your brains and your vision to do this, otherwise, my advice would be as idiotic as to tell you to buy cheap and sell clear.
So it’s never your thinking that makes the big money, it always is your sitting, Sitting tight!
Men who can both be right and sit tight are uncommon.
The above is for information purposes only. It is not investment advice.
