Data shows: Professional traders increase short positions despite Bitcoin price breaking $12,000

As Bitcoin (BTC) breaks through the $12,000 resistance, the derivatives market has become overly bullish. On October 12, when BTC briefly tested $11,700, both the futures basis and options 25% delta skew reached current levels but failed to maintain momentum.

What is different between the current situation and nine days ago is the positioning of top cryptocurrency traders. On October 12, these traders increased their long positions, but during the recent rally of Bitcoin to $12,000, these professional traders increased their short positions.

Despite the shift in market sentiment, traders should not automatically draw conclusions based on long/short indicators alone. For new traders, it is impossible to determine the positions of top traders in the OTC market.

Therefore, derivatives pricing is a better way to assess how bullish or bearish professional traders are. This indicator focuses on actual market conditions, while the fear and greed index and option call/put ratio are indicators that represent the past.

Futures markets typically trade at slightly higher prices than regular spot exchanges. This event is not unique to the crypto market, but rather a derivatives effect.

For a healthy market, the annualized rate of futures contract premiums (or basis) should be between 5% and 10%. Figures above this range indicate excessive optimism as traders bet that prices will go higher. Conversely, negative futures contract premiums indicate bearish sentiment.

Annualized premium of BTC 3-month futures contracts. Source: Skew

The chart above shows that the basis indicator has been hovering at overly optimistic levels, similar to what happened on October 12th.

Traders should not confuse optimism with leverage, as positive funding rates on perpetual contracts would also be needed to validate this thesis.

On most exchanges, perpetual contract funding rates are settled every 8 hours, and longs (buyers) pay shorts as long as the funding rate is positive. This situation would be typical of over-leveraged buyers, but so far this has not been the case.

BTC perpetual contract funding rate Source: Digital Assets Data

The data above shows that despite the absence of any sustained funding rate, the funding rate has been volatile. The standard measurement period for this indicator is 8 hours. Therefore, a funding rate of 0.05% is equivalent to 1% per week. When the funding rate is negative, the opposite is true.

As for the BTC options market, a similar shift occurred when the 25% delta skew indicator entered the overconfident bullish zone. A negative skew indicator indicates that the cost of a call (buy) option is higher than the price of a similar put (sell) option, thus indicating bullish sentiment. On the other hand, a positive skew indicator indicates bearishness.

BTC 3-month option 25% delta skew Source: Skew

Note that the skew indicator is close to its lowest level in 6 months, showing the optimism of traders. This situation is the same as on October 12, when BTC rose 10% in 4 days. Although there is nothing to prevent the skew indicator from staying at the current level for a long time, it is unlikely in BTC history.

After reading derivatives market indicators, one might conclude that professional traders are bullish by increasing long positions above $12,000. However, data provided by exchanges on the net long-short ratio of top traders shows otherwise.

Client long/short ratio. Source: Binance and OKEx

There are often discrepancies between exchanges’ methodologies, so readers should focus on changes rather than absolute numbers. Based on the above data, it is safe to say that top traders were either neutral or increasing their long positions prior to October 12.

On the other hand, both exchanges have seen considerable volatility over the past two days as top traders have become more active in selling when Bitcoin approached $12,000.

Therefore, regardless of whether derivative indicators are bullish, these traders are indicating a lack of short-term optimism.

These seemingly contradictory signals may reflect the fact that Bitcoin has recently risen 15% in two weeks, causing some traders to realize gains. Even if the derivatives market continues to be bullish, top traders seem to have no reason to increase long positions at current levels.

Even though top traders appear to be failing at the moment, they do not seem to be in a rush to FOMO (fear of missing out) at current levels. Unless someone starts building large-scale long positions above $12,000, this support level cannot be considered strong enough yet.