Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
Bitcoin’s price surge in the last month surprised even the most optimistic crypto-enthusiasts. In fact, it even overshot the S/F model’s price projection. The recent price correction doesn’t represent a great concern for HODLers, but without knowing its valleys and peaks, can those who use leverage say the same?
Bitcoin Price Wildly Spinning
Bitcoin’s price moves at a dizzying pace. Soon after Bitcoin achieved the ATH price at $42k, it then slumped to $30k, and then up again to over $35k. As noted previously, the upward BTC prospect still appears to be sound in the long term. This means that HODLers shouldn’t panic, but those who are leveraged need to pay attention.
It bears keeping in mind that with a record number of BTC addresses comes the consequence of an increased pool of retail investors who defy the HODLing trend. Accordingly, many couldn’t resist selling their BTC at such an enticing ATH price of $42k.
In a jumble to place attribution to Bitcoin’s price moves in the near future, we can also take a look at BTC futures. According to the Block Crypto Data, the trading volume for futures and options in December 2020 achieved an ATH of $1.06 trillion, representing an increase of 21.6% from November.
Futures as a Market Sentiment Indicator
Updated on January 11, not even halfway into the month, the BTC trading volume looks to overtake November. Will it go even higher than December ATH is another matter. More importantly, why is the futures trading volume important to understand BTC price moves?
As you know, trading futures involves contracts between two parties, facilitated by the exchange, who agree to buy/sell BTC at a future date. Therefore, futures represent a contractually locked value of Bitcoin. In turn, this lets us see BTC’s long-short ratio.
The long-short ratio is a comparative indicator between the amount of derivatives (futures) that are available for selling and the amount of borrowed and sold – shorted. As a result, we can take an overview of investor sentiment. If it is positive, the long-short ratio will be high, with more long positions than short ones.
Indicators Offer Limited Use in an Irrational Market
Unfortunately, the long-short ratio is not a direct indicator of the BTC price movement. Likewise, it is also not the indicator of the exchange’s interest in the price movement, because we don’t know their starting point. Speaking of exchanges, they represent another factor to consider.
Crypto exchanges make their money on the margins, so high long-short ratios are not something they like. In order to honor their futures, they might just sell 100,000 BTC to lower its price. With that in mind, you can use the Relative Strength Index (RSI) indicator to gauge Bitcoin price momentum.
If it is above 70%, the asset is considered overbought, and if it is under 30%, the asset is considered oversold. As usual, keep this caveat in mind – indicators are just that – indicators, not mathematical guarantees. If any entity can reliably predict Bitcoin price moves, it would be crypto exchanges.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.