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.
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.
Case Research into Bitcoins on-chain evaluation (Half #4)
This story is the final a part of the case research I’ve been writing; try the earlier ones…
Half#1: On-chain Was Revealing, How Sensible Cash Works?
Half#2: How I Stored My Sanity In The Might Time Panic?
Half#3: Cyclicity Of Panics, How To Time Crashes?
Earlier than diving deep into evaluation, I wish to make clear a number of phrases first as they’re necessary for a deeper understanding of the system.
Open Pursuits(O/I)
It’s the whole worth of open positions on an trade, now this place could be a lengthy or a brief. What it tells the quantity of leverage that exists out there.
Funding Price
It’s the distinction between Perpetual Futures(futures that don’t have an expiry) markets and spot costs. When it’s optimistic, there are internet longs in the marketplace, and when unfavorable, there are internet shorts out there.
Now, this doesn’t imply a unfavorable funding fee means the market is bear, what it means is the leveraged market members are extra inclined in the direction of a sure course, that being bearish if the funding fee is unfavorable.
It’s higher to have a low funding fee for a greater value motion devoid of any sudden pullbacks.
So funding charges inform us how far the by-product market is prolonged from the spot value and open curiosity inform us how a lot of current value motion is attributable to leverage, thus giving us an concept concerning the sustainability of future value motion and the energy of a bull or bear run i.e the longevity of it.
Within the final article, I confirmed my commentary of how value tends to backside out at precisely 17:30 IST, which can be when the New York session goes dwell. It’s a well-known incontrovertible fact that Asian session is often bearish relative to western classes, however the precision of the timing was one thing which shocked me and likewise construct my confidence about utilizing it for timed entry.
It lastly occurred!
As I defined in my earlier article that I noticed a dip to the 29k vary and the way I used to be ready to time it too. Whereas taking entries across the 29k spot, my short-term indicators have been bearish, solely the 15min ones. So I stored affected person until the value reached above 30k assist, and whereas it was round 31.5k to 32k, my medium flip indicators gave one other entry, and man, was I stunned with the transfer.
This transfer jogged my memory of an unprecedented transfer that occurred on nineteenth Might, and like then, there are a lot of similarities between them.
There was an enormous and sudden drop within the open pursuits, i.e the variety of open orders. This is a sign of many individuals being liquidated on the similar time.
Clearly, the by-product merchants have been brief squeezed out of the market. This is a crucial commentary I made, that for somebody to generate profits in these markets, there should be somebody shedding it. With massive cash gamers who’ve entered the markets, it’s principally the unskilled lots who’re used to socialize the losses upon.
The distinction between each the squeezes was that folks have been shorting bitcoin on this one whereas, on Might 19, they have been on the lengthy facet.
On nineteenth Might, the funding fee was internet optimistic i.e derivatives market bullish, whereas, on this squeeze, it was internet unfavorable i.e derivatives market was bearish.
One other main distinction is in the kind of collateral used for leverage.
This reveals the proportion of merchants who have been utilizing crypto property as collateral to realize leverage for his or her trades, which has declined sharply because the all-time excessive.
Whereas the variety of individuals utilizing secure cash as collateral has elevated considerably.
I think 2 causes for this sudden shift in mindset from crypto margined to money margined.
First, once you put up crypto as collateral and purchase able, you might be effectively to do if the market strikes up as then each your collateral and your place achieve. However let’s simply say the market turns bear and each begin to lose value, in such a case relying upon the quantity of leverage, your place will shut and wipe you out, and after a sure spot value, your collateral may get offered to mitigate the counterparty danger.
Was a whopping 31% drawdown within the BTC collateralized open pursuits after the nineteenth Might panic sell-off? So to guard themselves from future black-swan liquidation occasions, the by-product merchants began shifting to secure coin collaterals to protect the worth of their collateral and never get margined out.
Second, there was a rise within the open pursuits, as proven under.
This rise in open curiosity is consistent with the rise in secure coin-margined open pursuits whereas crypto-margined OIs have decreased considerably, all this with an more and more unfavorable funding fee instructed that folks have been utilizing secure coin-margined as they’re bearish concerning the market.
Till not too long ago once they turned bullish, together with which we will see an increase in crypto-margined open pursuits.
With this, it is perhaps the case {that a} rise in cash-margined OIs suggests a bearish path out there, the place an increase in crypto-margined OIs suggests a bullish run out there from a by-product dealer standpoint.
It’s essential to perceive that such overextended eventualities are when the market goes in opposition to the vast majority of members, and you can also profit from it by betting in opposition to it.
Have you learnt it’s a bull market?
Trying on the success of such exact entries and big actions does make me completely happy, however on the similar time, there have been individuals who have misplaced significantly in these instances.
Folks attempt to play massive on the small fluctuations within the markets, forgetting that massive cash was not within the particular person fluctuations however the primary motion.
It doesn’t turn out to be a bear market as a result of the market has taken the time and has not moved as but. The market doesn’t beat them. They beat themselves as a result of although they’ve brains, they can’t sit tight.
For me, I don’t suppose one can catch all of the fluctuations. So in a bull market, your sport is to purchase and maintain till you consider that the bull market is close to its ends, relying upon the time frames you wish to play in. That stated, it’s all the time sensible to maintain 15–20% of that asset even at your exit in case you miss out on the following foreseen fluctuation.
It’s a must to use your brains and your imaginative and prescient to do that, in any other case, my recommendation could be as idiotic as to let you know to purchase low cost and promote clear.
So it’s by no means your pondering that makes the massive cash, it all the time is your sitting, Sitting tight!
Males who can each be proper and sit tight are unusual.
