In-depth: Worried about a sharp drop in Bitcoin prices? Three key indicators to watch

As Bitcoin price attempts to break through $20,000, these three key indicators can help traders spot bullish and bearish sentiment in the crypto market.

The price of Bitcoin (BTC) has been languishing around the $20,000 mark for the past week, which has made some traders impatient. The lack of upward momentum is problematic in the eyes of some traders, especially considering that Bitcoin tested the $16,200 level about a week ago.
Experienced traders know that there are key indicators that can be used to indicate signs of a trend reversal. These indicators include trading volume, futures premium, and the positions of top traders on major exchanges.
Some bearish indicators don't precede every decline, but usually some signs of weakness appear. Every trader has his or her own system, and some will only act when three or more bearish conditions are met, but there are no set rules for determining when to buy or sell.
The futures contract price should not be lower than the spot trading price. Some trading indicators on the website claim to show the long-short ratio of various assets, but in fact, they simply compare the trading volume of the bid and ask prices.
A better approach is to monitor perpetual futures (inverse swaps) funding rates.
The open positions of buyers and sellers of perpetual contracts are always consistent across any futures contract. There is no way an imbalance can occur because every trade requires a buyer (long) and a seller (short).
Funding rates ensure that there is no risk imbalance in trading. When sellers (shorts) demand more leverage, the funding rate is negative. Therefore, these traders will be the ones paying the fees.

BTC perpetual futures weekly funding rate Source: Digital Assets Data

A sudden shift into negative territory indicates a strong willingness among traders to maintain short positions. Ideally, investors will monitor several exchanges simultaneously to avoid an eventual anomaly.
Funding rates can introduce some distortions because it is the preferred tool for retail traders and is therefore subject to excessive leverage. Professional traders tend to dominate long-term futures contracts that set expiration dates.
By measuring how much of a premium futures trade to the regular spot market, traders can judge the degree of bullishness for themselves.

BTC futures premium in January 2021 Source: Digital Assets Data

Note that futures often trade at a premium of 0.5% or more to spot relative to general spot trading. Whenever the premium disappears or turns negative, it is a worrisome red flag. This situation, also known as backwardation, indicates strong bearishness.
Monitoring Volume is Key In addition to monitoring futures contracts, good traders also track volume in the spot market. Breakouts of important resistance levels on low volume are interesting. Usually, low volume indicates a lack of confidence. Therefore, large price changes should be accompanied by strong volume.

BTC cumulative spot trading volume Source: Coinalyze.net

Despite recent above-average trading volumes, traders should remain skeptical of large price moves on daily volumes below $3 billion, especially in light of the past 30 days.
Based on data from the past month, volume will be a fundamental metric to watch as traders attempt to push Bitcoin price towards the $20,000 level.
The long-short ratio of top traders can predict price changes Another key metric that savvy investors watch is the long-short ratio of top traders, which can be found on major crypto exchanges.
There are often differences between exchanges' calculation methods, so we should monitor changes rather than absolute numbers.

Long-short ratio of top BTC traders on Binance. Source: Binance

In the example above, a sudden drop below 1.00 would be a troubling sign. This is because the 30-day historical data and the current ratio of 1.23 favor bulls.
As mentioned earlier, ratios can vary significantly between exchanges, but this effect can be offset by avoiding direct comparisons.

OKEx BTC top traders’ long-short ratio Source: Bybt.com

Unlike Binance, OKEx top traders generally keep the long-short ratio below 1.00, although it does not necessarily indicate bearishness. According to its 30-day data, below 0.75 should be considered worrying.
There are no definite rules or methods to predict a sharp drop as some traders require multiple indicators to turn bearish before they opt to enter a short position or close it.
Nonetheless, monitoring funding rates, spot volumes, and the long-short ratio of top traders can provide a clearer picture of the market than simply analyzing general oscillators such as candlestick charts, relative strength indexes, and moving averages.
This is because the indicator in question directly measures professional trader sentiment, so it is crucial to have a clear understanding of this as Bitcoin attempts to break through $20,000. (Cointelegraph)