The long-to-short ratio of the Bitcoin margin on Bitfinex reaches its highest level ever

September 12 will leave a mark that will likely remain for quite a while. Traders on the Bitfinex exchange have significantly reduced their bearish bets on leveraged Bitcoin (BTC) and the lack of demand for short may have been caused by the expectation of interesting inflation data.

The bears may not have been confident, but the US consumer price index (CPI) for August was above market expectations and appear to be on the right side. The inflation index, which tracks a large basket of goods and services, increased by 8.3% over the previous year. More importantly, the energy price component fell by 5% over the same period, but was more than offset by rising costs for room and board.

Shortly after the release of worse-than-expected macroeconomic data, US equity indices tumbled, with high-tech Nasdaq Composite Index futures slipping 3.6% in 30 minutes. Cryptocurrencies accompanied the worsening mood and the price of Bitcoin fell by 5.7% over the same period, erasing the gains of the previous 3 days.

Identifying the market decline on a single inflationary metric would be naive. In a Bank of America survey with global fund managers, 62% of respondents said a recession is likely, which is the highest estimate since May 2020. The research paper collected data in the week of September 8 and it was led by strategist Michael Hartnett.

Interestingly, as this all happens, Bitcoin margin traders have never been so bullish, according to one metric.

Margin traders flew out of bearish positions

Trading on margin allows investors to leverage their positions by borrowing stablecoins and using the proceeds to buy more cryptocurrency. On the other hand, when those traders borrow Bitcoin, they use the coins as collateral for the shorts, which means they are betting on a decrease in the price.

That’s why some analysts monitor Bitcoin and stablecoin total loan amounts to see if investors are biased up or down. Interestingly, Bitfinex margin traders entered their highest long / short leverage ratio on September 12th.

Bitfinex Margin Bitcoin long / short ratio. Source: TradingView

Bitfinex margin traders are known for creating position contracts of 20,000 BTC or higher in a very short time, indicating the participation of whales and large arbitrage banks.

As the chart above indicates, the number of BTC / USD long margin contracts exceeded shorts 86 times on September 12, at 104,000 BTC. For reference, the last time this indicator moved above 75 and favored the longs was on November 9, 2021. Unfortunately, for the bulls, the result benefited from the bears as Bitcoin plunged 18% over the next 10 days.

Derivatives traders were overly enthusiastic in November 2021

To understand how professional bullish or bearish traders are positioned, one should look at the futures base rate. This indicator is also known as the futures premium and measures the difference between futures contracts and the current spot market on regular exchanges.

Base rate of 3-month Bitcoin futures, November 2021. Source: Laevitas.ch

3-month futures typically trade at an annualized premium of 5% to 10%, which is considered an opportunity cost for arbitrage trading. Notice how Bitcoin investors were paying excessive premiums for longs during the November 2021 rally, the exact opposite of the current situation.

On September 12, Bitcoin futures contracts were trading at a premium of 1.2% over regular spot markets. Such a level of less than 2% has been the norm since August 15, leaving no doubt about the lack of leveraged buying activity by traders.

Related: This week’s Ethereum merger may be the most significant shift in cryptocurrency history

Possible causes of the spike in the margin funding ratio

Something must have caused Bitfinex short-margin traders to reduce their positions, especially considering the longs (bulls) remained flat in the 7 days leading up to September 12th. The first probable cause is liquidations, which means that sellers had insufficient margin as Bitcoin gained 19% between 6 and 12 September.

Other catalysts may have led to an unusual imbalance between long and short. For example, investors may have shifted collateral from Bitcoin’s margin operations to Ethereum, seeking some leverage as the merger approaches.

Finally, the bears could have decided to temporarily close their marginal positions due to the volatility surrounding the US inflation data. Regardless of the rationale behind the move, there is no reason to believe the market has suddenly become extremely optimistic as the futures markets premium paints a very different scenario from November 2021.

The bears still have a half-full glass reading as Bitfinex margin traders have room to add short (sell) leverage positions. Meanwhile, bulls may celebrate the apparent lack of interest in betting on prices below $ 20,000 from those whales.

The views and opinions expressed herein are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your research when making a decision.