Rally to $17K - hype or sentiment?

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Key points: 

• Binance re-entry Japan, Gemini expands to Greece, U.S. Senate Treasury Committee checks 6 changes on customer protection and market manipulation.
• Based on data from futures premium and long/short ratio metrics, traders are building up long positions being reluctant to leveraged positions. 
• However, the bears may continue to exert pressure and maintain Bitcoin below $17,000 in the short term.

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After briefly testing support at $17,000, bitcoin prices surged 6.1% between Nov. 28 and 30. Favorable regulatory winds may have helped drive the rally after the Binance exchange announced on Nov. 30 that it would acquire a regulated cryptocurrency exchange in Japan.

Binance shut down its operations in Japan in 2018 after being warned by Japan's Financial Services Agency for operating without a license. The acquisition of Sakura Exchange BitCoin will mark Binance’s re-entry into the Japanese market.

Additionally, on November 30, the Gemini exchange announced new regulatory approvals in Italy and Greece. The exchange has been approved to register as a virtual currency operator with the Italian payment services regulator. Gemini has been approved as an exchange and custodial wallet provider in Greece.

However, not everything is positive when it comes to regulation. In a separate letter dated Nov. 28, U.S. Senate Treasury Committee Chairman Ron Wyden requested information from six cryptocurrency exchanges. The legislature aims to meet the need for "consumer protection modeled on long-term guarantees to customers of banks, public banks, and securities brokers".

Wyden gave the six companies until Dec. 12 to respond on consumer asset protection and market manipulation. The Senate Agriculture Committee has also scheduled a hearing to investigate the FTX debacle on Dec. 1.

Amid these events, Bitcoin has been trying to break above $17,000 for the past 18 days, so some selling pressure is clearly still above that level.

The most likely culprit is the risk of bitcoin miners capitulating after seeing falling spot prices and rising Bitcoin mining difficulty squeeze profits. We noted that Bitcoin miners are under intense pressure after looking to sell accumulated BTC for a profit.

Let's look at crypto derivatives data to see if investors are still averse to Bitcoin.

The futures market is no longer in backwardation

Fixed-month futures contracts typically trade at a slight premium to the regular spot market, as sellers charge more to extend settlement times. Technically known as contango, this condition is not unique to crypto assets.

In a healthy market, futures should trade at an annualized premium of 4% to 8%, which more than offsets the risk and cost of capital.

In light of the above data, derivatives traders have raised expectations that Bitcoin futures contango is no longer negative — implying that the demand for long and short leverage is balanced.

However, the current 0% premium is far from the 4% long line, indicating that professional traders are reluctant to add to leveraged long positions.

Another notable development is the ratio of longs to shorts, which has improved over the past two days. To rule out external factors that may only affect quarterly contracts, traders should analyze the long-to-short ratio of top traders.

The indicator also collects data from live exchange client positions and perpetual contracts to better inform professional traders' positions.

Although Bitcoin failed to break above $17,000 on Nov. 30, professional traders slightly increased their leveraged long positions based on long-short indicators. For example, Binance’s trader ratio increased from 1.07 on November 28 to the current 1.10.

Likewise, OKX’s long-short ratio has risen slightly in two days, from 0.98 to its current 1.03. The indicator eased back slightly to 1.02 on the Huobi exchange, suggesting that traders have not turned bearish after rejecting resistance recently.

No negative price action is a bullish indicator

Traders should not conclude that the lack of contango reflects deteriorating market conditions, as broader long-to-short ratio data shows whales and market makers increasing their long leverage.

Bitcoin price action has been surprisingly positive given the recent negative headlines and concerns surrounding the potential for a regulatory crackdown and the ability of miners to withstand an extended crypto winter.

It may take longer for investors to regain confidence and believe that the current contagion risk is over. Therefore, the bears may continue to exert pressure and maintain Bitcoin below $17,000 in the short term.