Liquidation risk for Bitcoin increases

Key points:

• According to the analysis, the stagnant open interest in futures contracts indicates low confidence among bears.
• Regulatory uncertainty may have played a key role in limiting Bitcoin's upside potential. On Dec. 8, SEC issued new guidance that could lead public companies to disclose their exposure to crypto assets.
• The margin borrowing ratio of OKX traders indicates that professional traders are still maintaining leveraged longs.
• The indicator is currently at 35, making a solid case for stablecoin lending and suggesting that bears are not confident about taking leveraged bearish positions.
• Options traders have reduced their risk aversion to unexpected price drops. However, the current options skew delta bias of 15% suggests that investors remain concerned as market makers are less involved in downside protection.

Bitcoin prices had a mixed reaction on Dec. 9 after the U.S. producer price report for November showed a 7.4% rise over 2021. The data suggested that wholesale costs may continue to rise and that inflation may persist for longer than investors had previously expected. Oil prices also remained in focus for investors, with crude WTI hitting a fresh yearly low of $71.10 on Dec. 8.

The U.S. dollar index (DXY), which measures the greenback's strength against a basket of major foreign currencies, held at 104.50, but hit a five-month high of 104.10 on Dec. 4. That suggests a lack of confidence in the Fed's ability to rein in inflation without triggering a deep recession.

Trader Gutsareon noted that volatile activity led to the liquidation of leveraged longs and shorts, which subsequently failed to sell off below $17,050.

According to the analysis, the stagnant open interest in futures contracts indicates low confidence among bears.

Regulatory uncertainty may have played a key role in limiting Bitcoin's upside potential. On Dec. 8, the U.S. Securities and Exchange Commission (SEC) issued new guidance that could lead public companies to disclose their exposure to crypto assets.

The SEC's Division of Corporate Finance said the recent crisis in the crypto asset industry "caused widespread disruption" and that U.S. companies may have disclosure requirements under federal securities laws to disclose whether these events would affect their business.

Let's take a look at derivatives indicators to understand better where professional traders are positioned in current market conditions.

Bitcoin leveraged longs face sharp surge

Margin markets reveal what professional traders are up to as they allow investors to borrow cryptocurrencies to leverage their positions.

For example, participation can be increased by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only short the cryptocurrency by betting on a drop in price. Unlike futures contracts, the balance between margin longs and shorts is not always equal.

OKX stablecoin/BTC margin lending ratio. Source - OKX

The above chart shows that the margin borrowing ratio of OKX traders increased from December 4 to 9, indicating that professional traders are still maintaining leveraged longs after multiple failed attempts to break through the $17,300 resistance level.

The indicator is currently at 35, making a solid case for stablecoin lending and suggesting that bears are not confident about taking leveraged bearish positions.

Options traders remain risk-averse

Traders should analyze the options market to see if Bitcoin will finally succumb to the bearish news flow. A delta skew of 25% is a clear sign when arbitrage desks and market makers are overcharging for upside or downside protection.

The indicator compares similar call (buy) and put (sell) options, turning positive when fear prevails because puts have a higher protective premium than risky calls.

In short, the bias indicator will hover above 10% as traders worry about a Bitcoin price crash. On the other hand, general excitement reflects a negative skewness of 10%.

Bitcoin 60 D options 25% delta skew. Source - Laevitas

As the chart above shows, the 25% delta skew improved between December 4th and 9th, suggesting that options traders have reduced their risk aversion to unexpected price drops. However, the current delta bias of 15% suggests that investors remain concerned as market makers are less involved in downside protection.

From one side, the lack of open interest increase as Bitcoin tested the intraday low on Dec. 9 seems encouraging. Still, excessive use of margin indicates that buyers might be forced to reduce their positions during surprise downside moves.

The longer it takes for Bitcoin to recapture $18,000, the riskier it becomes for leverage margin longs. Traditional markets continue to play an essential role in setting the trend, so a potential retest down to $16,000 cannot be ruled out.