Why do we keep chopping around?

When I woke up this morning, I noticed that Bitcoin had once again failed to hold a move. If we look at the chart of the past few weeks, we can see that every move that is made is ultimately given back in its entirety. This can be clearly seen in the image below.

There are, of course, reasons for this phenomenon, and in this edition of the trade letter, I want to delve deeper into why this has been happening so often lately. So this will be a more extensive Bitcoin edition where we will delve a bit deeper into the subject.

Spot is selling BTC

In the first paragraph, I will address the fact that we are in a market driven by futures, and I will further substantiate this in later paragraphs. Looking at the chart, we can see that three lines are displayed.

These lines represent the following:

Orange = Spot CVD

White = Futs. Stablecoin-margined CVD

Blue = Futs. COIN-margined CVD

The chart represents the past few days, but this is something that has been happening for a longer period of time. We can see that the people in Spot are mainly selling, which is evident from the continuous downtrend of the orange line. The futures, both stablecoin and coin margined, are the ones causing impulses in the market. This means that the moves that are made are mostly made with borrowed money, and these kinds of things are not sustainable for a market.

Liquidations are causing impulsive moves

In the previous paragraph, I already mentioned that there is mainly borrowed money in the market. Because of this borrowed money, we can also see impulsive moves in the market. These moves are fast and seem to have a lot of strength, but that's not actually the case. These moves are actually the result of a large number of liquidations that occur at a certain moment.

First, let's look at the move towards $27.4K on May 23rd. After a period of consolidation, we saw a "strong" upward move, or so it seemed. If we look at the chart, we can see that this upward move was caused by the people who were liquidated from their short positions. At the time of the upward move, we can see a large increase in the amount of short liquidations. There are a large number of people who are short in the consolidation, anticipating a further move downwards. As soon as the price starts to rise, a large number of people are wiped out of the market, these short contracts are bought up, and we see a snowball effect upwards.

We can explain the downward move last night in the same way. Yesterday, the price was mostly moving sideways, and people who opened leverage long positions in the consolidation, anticipating higher prices, were liquidated last night. As soon as the first people are liquidated, these long contracts are sold, and if there is a large amount, the price is pushed down rapidly. Here too, we can see a large number of long liquidations.

Open interest keeps going up

But what can we expect now? To explain this, I will use Open Interest. We can see that after the downward move, the price is now moving sideways. At the same time, we see that the Open Interest is increasing significantly. This means that a lot of leveraged positions are being opened at the moment. However, these can be both shorts and longs. To draw a conclusion, we need to look at the funding rates. Shorts and longs must always be in balance. In a negative funding situation, the people who are short pay the funding to the people who are long, and vice versa. At the moment, we can see that the funding is slightly positive or around baseline. This leads me to believe that it is likely that the positions being opened are mainly longs. Therefore, I think it is probable that we will see a deeper flush downwards.

BTCUSDT.P

1h-timeframe

What you shouldn't do now is blindly click the short button, and we should also look at the price action to ultimately come up with a certain plan. What I would like to see is an upward move. On this retracement upwards, I would like to consider opening a short position. The area of interest in this case will be the supply zone indicated by the red area.

All in all, these are very shaky conditions, and what you should especially not do is let yourself get chopped up in this market. Patience is very important, and in trading, protecting your capital is ultimately the most important thing.

For now, I wish you all a good day, and see you next week!

Written by: Daan Foppen