The price of Bitcoin experienced a significant drop of 11.5% from August 16th to August 18th, resulting in the liquidation of $900 million worth of long positions. This decline also caused the price to reach its lowest point in two months. Prior to the drop, many traders had anticipated a breakout in volatility that would push the price upward. However, this expectation proved to be incorrect.
The substantial liquidations prompted an important question: did professional traders benefit from the price crash? There is a common belief among cryptocurrency traders that whales and market makers possess an advantage in predicting significant price shifts, allowing them to outperform retail traders. While there is some truth to this belief, as advanced quantitative trading software and strategically positioned servers can give professionals an edge, it does not make them immune to financial losses when the market becomes unstable.
For larger-sized and professional traders, a majority of their positions may be fully hedged. By comparing these positions with previous trading days, it is possible to estimate whether recent movements anticipated a widespread correction in the cryptocurrency market.
Margin trading plays a significant role in magnifying investors’ positions by borrowing stablecoins and using the funds to acquire more cryptocurrency. Conversely, traders who borrow Bitcoin employ the coins as collateral for short positions, betting on a price decline. Bitfinex margin traders, in particular, are known for quickly establishing position contracts of 10,000 BTC or more, indicating the involvement of whales and substantial arbitrage desks.
An analysis of Bitfinex’s margin long position on August 15th reveals that it stood at 94,240 BTC, nearing its highest point in the past four months. This suggests that professional traders were caught off guard by the abrupt BTC price crash.
The equilibrium between margin longs and shorts is not inherently balanced, unlike futures contracts. A high margin lending ratio signifies a bullish market, while a low ratio suggests a bearish sentiment. The OKX BTC margin lending ratio on August 16th approached 35 times in favor of long positions, aligning with the preceding seven-day average. This indicates that whales and market makers maintained their position on margin markets before the Bitcoin price collapse on August 16th and August 17th. This information further supports the argument that professional traders were unprepared for any form of negative price movement.
Another indicator of professional traders’ lack of readiness is the net long-to-short ratio of the top traders in futures contracts. By consolidating positions across perpetual and quarterly futures contracts, one can gain insights into whether professional traders lean towards a bullish or bearish stance. Prior to the release of the Federal Reserve’s Federal Open Market Committee minutes on August 16th, prominent BTC traders on Binance and OKX exhibited high long-to-short ratios. This suggests that professional traders were not adequately reducing their exposure prior to the price correction on August 16th.
Taking into account the data from BTC futures and margin markets, it can be reasonably assumed that professional traders were taken by surprise and did not profit from the price crash. This indicates that even with their advantages and resources, professional traders are not infallible and can face significant financial losses in volatile markets.
It is important to note that this article is for general information purposes and should not be considered legal or investment advice. The views expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.