Bitcoin traders ramp up leverage longs despite crypto critics saying BTC is ‘pure Ponzi’

Bitcoin (Bitcoin) price has tested the $16,000 resistance multiple times since the 25% crash that took place between November 7th and 9th and some critics will justify its bearish bias by incorrectly assuming that the Failure of the FTX exchange should trigger a much broader correction.

For example, Daniel Knowles, a correspondent for The Economist, says that the world’s 26th largest tradable asset, with a market cap of $322 billion, is “amazingly useless and wasteful.” Knowles also said that “there is still no logical case specific to bitcoin. It’s pure Ponzi.”

If you think about it, to outsiders, Bitcoin’s price is the number one indicator of success, regardless of its valuation, which outperforms secular companies like Nestlé (NESN.SW), Bank of America (BAC), and Coca-Cola (KO).

Most people’s need for centralized authority over their money is so ingrained that the success and failure rate of cryptocurrency exchanges has become the gatekeeper and measure of success, when the opposite is true. Bitcoin was created as a peer-to-peer money transfer network, so exchanges are not synonymous with adoption.

It is worth noting that Bitcoin has been attempting to break above $17,000 for the past seven days, so buyers above this level are certainly lacking in appetite. The most likely reason is that investors fear contagion risks, similar to Genesis Block’s latest victim related to FTX to discontinue the service due to liquidity problems. According to recent reports, the company announced plans to cease trading and shutter operations.

Bitcoin price is stuck in a downtrend and it will be hard to shake off, but it is a fallacy to assume that the failure of the centralized cryptocurrency exchange is the main reason for Bitcoin’s downtrend or reflects its actual value.

Let’s look at crypto derivatives data to understand if investors remain risk-averse towards Bitcoin.

The futures markets are in backwardation and that is bearish

Fixed month futures contracts typically trade at a slight premium to regular spot markets as sellers charge more money to hold settlement longer. Technically known as contango, this situation is not exclusive to crypto assets.

In healthy markets, futures should trade at an annualized premium of 4% to 8%, which is enough to offset the risks plus the cost of capital.

Bitcoin 2 Month Futures Annualized Premium. Source: Laevitas.ch

Considering the data above, it is evident that derivatives traders turned bearish on Nov. 9 as the Bitcoin futures premium entered backwardation, meaning demand for shorts – bearish bets – is extremely high. This data reflects the unwillingness of professional traders to add leveraged long positions (bull) despite the inverse cost.

The longs-to-shorts ratio shows a more balanced situation

To rule out externalities that may have only affected quarterly contracts, traders should analyze the long-to-short ratios of top traders. It collects data from on-site exchange clients’ positions, perpetual and fixed calendar futures contracts, thus better informing how professional traders are positioned.

There are occasional methodological discrepancies between different exchanges, so readers should be watching changes rather than absolute numbers.

Bitcoin long-to-short ratio of exchanges top traders. Source: coin jar

Although Bitcoin failed to break the $17,000 resistance on Nov. 18, professional traders slightly increased their leveraged long positions according to the long-to-short indicator. For example, the Huobi dealer ratio improved from 0.93 on Nov. 16 and currently stands at 0.99.

Related: Crypto Biz, FTX Fallout leaves blood

Similarly, OKX showed a slight increase in its long-to-short ratio as the indicator rose from 1.00 to currently 1.04 in two days. Finally, the metric remained flat near 1.00 on the Binance exchange. Hence, such data shows that traders have not turned bearish after the recent rejection of resistance.

Consequently, one should not conclude that considering the broader analysis of the long-to-short ratio, futures backwardation does not show evidence of excessive bearish demand from whales and market makers.

It will likely take time for investors to discount the potential regulatory and contagion risks from the demise of FTX and Alameda Research. Until then, a strong recovery for Bitcoin seems unlikely in the short term.