It’s a wild year for the cryptocurrency market! So as an environmental journalist in OverTraders.com I’m diligently watching the newest developments and doing my best to keep you informed. Recent data tells a different, more concerning story. One in which overconfidence could be soothingly lulling us away from deeper, more structural threats. To say that Bitcoin’s resurgence is making some people happy would be putting it mildly. Upon closer inspection, the extreme increase in the long positions could be confidence’s house of cards.
The numbers don't lie: Bitcoin margin longs have jumped by a significant 27.5% since February 20. This surge has fueled speculation that the recent 12.5% price gain, rebounding from a $76,700 low on March 11, is primarily driven by leverage. Is this an indicator of true market strength, or a house of cards poised to fall?
Many years analyzing market dynamics has led me to understand that when positions become over-leveraged at an exorbitant pace, a correction is generally lurking around the corner. The allure of quick profits is often irresistible for traders. That temptation becomes their blind spot to the risks, creating over-extended positions that choke liquidity and worsen market volatility. It’s a situation I’ve seen over and over again, especially in new technology fields where hype can easily lead to a failure to do basic due diligence.
Further complicating matters is the jump in Short-Term Holder (STH) supply, a sign that speculative interest in Bitcoin has returned. This massive addition of new players could force prices up even in the short run. It introduces a class of investors that is much more prone to panic sell when the market drops. Recent Bitcoin buyers, particularly those who bought in the last week or month, are extremely susceptible to capitulation. This panic selling would compound any increased price drops.
There are plenty of things that still seem bullish on the surface. And the increased accumulation/distribution indicator means that demand for Bitcoin is higher than ever. At the same time, exchange outflows show that investors are increasingly stockpiling BTC rather than preparing to sell. All of this is great news, but all of this has to be considered in light of the underlying market forces at work.
The sharp drop in the long-short margin ratio on OKX, for instance, is followed by an increase in bullish market sentiment. This may sound like a paradox, but it is almost always a highly contrarian indicator. On the one hand, it indicates that the market is primed for a potentially spectacular move in the other direction. But it’s a testament to the healthy, underlying skepticism still at work beneath that regional, tech-driven optimism.
The borrowing interest rate for BTC on Bitfinex has skyrocketed. This indicates a positive turn towards building greater market confidence in BTC’s long-term potential. That’s all great news, but it doesn’t cancel out the prospect of serious short-term volatility. Even the most bullish market players can be caught off guard by a rapidly shifting market sentiment.
As someone who’s been following the activity of Long-Term Holders (LTH) religiously lately, there are other encouraging signs. These investors are generally considered the “smart money” in the Bitcoin space. The Binary Spending Indicator also signifying a deceleration, the slowdown in the Binary Spending Indicator indicates that LTH spending is slowing. As great as the recent rebound in LTH supply is, the decline in the rate of LTH accumulation could be an early warning sign pointing to a possible peak in their accumulation. Here’s why this aspect is important to keep in mind. Long-term holders (LTHs) have, historically, been a major part of the Bitcoin market’s stabilization efforts.
And still, even with the recent 24% correction from its all-time high of $109,000, most analysts are still optimistic about Bitcoin’s long-term prospects. I get the desire for Bitcoin to be a store of value, discreet store of value, hedge against inflation etc. First and foremost, I am a believer in taking the market with a grain of salt. At the same time, it’s important to recognize and understand the risks associated with it.
In the past, most bull markets experience at least one correction of 20% to 30% or more before continuing their upward path. That’s all part of the great market cycle in nature. Forthcoming rejoicing and excitement must not make us lose sight of a clear and present danger. Without new buyers, Bitcoin may enter a prolonged consolidation phase or even decline further as weaker investors exit their positions.
As an analyst who’s spent most of my career studying these types of volatility in the market, I recommend a go-slow approach. At OverTraders.com, we believe that risk management should be the top priority at all times, particularly during times of increased market volatility.
Here are a few risk management strategies that I believe are essential for navigating the current market conditions:
Position Sizing: Limiting position sizes to 1-2% of the account to prevent significant impact from single trades. This is a basic tenet of risk management but one that can truly save your capital during crazy risk-on periods.
Setting stop-loss orders to limit potential losses if the trade moves against the trader. This is the easiest but sharpest sword in your financial arsenal, providing real defense against surprise bad market news.
Daily Loss Limits (DLL): Setting a daily loss limit to prevent excessive losses and protect trading capital. This will prevent you from making emotional trading decisions and ensure that you are adhering to your larger investment strategy.
Using hedging strategies, such as buying put options or shorting a related asset, to offset potential losses. This can be a difficult maneuver to pull off, but it can be a powerful way to manage risk when times are uncertain.
Diversifying the portfolio by investing in multiple assets to reduce risk and increase potential returns. This principle might seem obvious but it’s key to smart investing. That added diversification can help protect your portfolio from significant losses on any one asset.
The recent all time high in Bitcoin longs is an indication of increasing bullish momentum from investors. This trend might just be a recipe for disaster as well. All in all, it’s important to be mindful, follow the market’s developments carefully, and have strong risk management plans in place. In my career, I’ve found that with smart risks come big rewards. This occurs only when those risks are guided by the analysis of an assessment based on a clear understanding of what exactly could go wrong. Caveat #1– Don’t be fooled by market perception. Usually the most advantageous moves are the ones that go against common sense.
