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The Crypto Fam @TheCryptoFam
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ANOTHER PERSPECTIVE - A potentially bearish signal for Bitcoin. Thread:
1/ Our last thread () focused on the BTC bear market that began on 12/17/17. We observed that BTC’s downtrend consisted of 3 major drives with a defined pattern - 1st correction (orange), failed rally (gray), and finally the major dump (blue).
2/ We ended the thread optimistically, citing some bullish signs. We observed each leg down was lower in volume across the spot exchanges, while the slope of each drive down was flattening. Now, we would like to alert you to a potentially bearish signal.
3/ The focus of this analysis will be a comparison of the second drive down vs. the third (current) drive down. There is a key potentially bearish difference. We’re going to look closely at a new component: Open interest.
4/ Open interest is defined as the number of outstanding futures or options contracts. For BTC trading, this would involve institutions like CME/CBOE, as well as leveraged trading on BitMex, Bitfinex, etc. Bitfinex data is the most readily available.
5/ Here is an overlaid chart showing the 2nd drive down, beginning in late February. The bottom section is the chart for Bitfinex short contracts. BFX Shorts reached all time high the exact day that BTC shot up $1500 in one candle.
6/ This was not a coincidence, but rather an epic short squeeze. A short squeeze is when a heavily shorted asset makes a sharp move up. Shorts are “liquidated”, meaning they are forced to close by buying back the asset. This makes a big move even bigger.
7/ During our most recent drop that began May 6th, the open interest story is much different. Short contracts increased while price fell in March. But this time, long contracts increased from 24k to 31k. Short contracts were stagnant. This means market sentiment is bullish.
8/ Our interpretation of this difference - Retail traders are confident we will bounce this time, likely because the bounce in early April was strong. Most believe we have definitively bottomed. For our sake, we hope they are right. If wrong though, things could get ugly.
9/ The rest of this discussion will focus on big players (“whales”) and the intentions behind their moves. This type of analysis is always speculative in nature. We can never know their motives for certain, but we can analyze past movements for our best guess.
10/ Our last thread asserted that big players were market selling at local tops. But why? The simple reason a big player would want to move the market price down is to accumulate the asset at a lower price.
11/ How much accumulation is enough? It all depends on market conditions. Big players would love to buy at $3k; however, it’s certainly possible that demand to buy BTC between $6k and $6.6k is too high for big players to push the price down further.
12/ Tying it all together: The early April bottom and our current situation have one key difference: Longs are much higher now, while shorts are much lower. The short side was an overcrowded trade in April, and big players easily exploited it.
13/ Big players with more money than us retail traders will ever have can move the market. They can exploit overcrowded trades when they have accumulated enough of the supply. Unfortunately for bulls, the long side appears overcrowded.
14/ How would this happen? It starts with large market sell orders, which drop price abruptly. In turn, stop loss orders can trigger (see chart), while longs are also liquidated. Further panic sells would ensue. Essentially - the inverse of the short squeeze from April 12th.
15/ We pointed out seller exhaustion and decreasing sell volume in our last thread. Now, we are showing you how big players could exploit an overcrowded trade, and therefore accumulate at an even better price ($5k or lower). Which case do you think is stronger? Let us know!
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