Since May 2022, the Bitcoin margin market on the Bitfinex exchange has been affected by an unusually high open interest (OI) of more than $2.7 billion. This news alone is shocking enough, especially considering that the price of Bitcoin fell from $39,000 to under $25,000 in the same period.
Traders looking to profit from their crypto positions have borrowed more than 105,000 bitcoins. The cause of the anomaly and the number of entities involved in the transaction are currently unknown.
Cheap loans support high demand
Bitfinex’s sub-0.1% annual interest rate may affect the size of the bitcoin lending market. By now, this has become the norm, creating a huge incentive to borrow even when there is no current need to borrow. Few traders would turn down the opportunity to use such ridiculously cheap leverage.
Margin lending can be used to take advantage of arbitrage opportunities, where traders take advantage of price differences between different markets. For example, borrowing bitcoin on margin allows a trader to go long in one market and short in another, profiting from the difference.
To understand how to use Bitcoin borrowing to profit on the derivatives market (including markets other than Bitfinex), we must understand the difference between futures and margin markets. Margin is not a derivative contract, so trades are made on the same order book as spot trades. Also, unlike futures, long and short margins are not always balanced.
For example, after buying 10 bitcoins with a margin, the coins can be withdrawn from the exchange. Naturally, such transactions (often based on stablecoins) require some form of collateral or margin.
If the borrower fails to return the position, the exchange will liquidate the margin to return it to the lender.
In addition, borrowers must also pay interest on the BTC obtained through margin trading. While operating procedures vary between centralized and decentralized exchanges, lenders typically determine the rate and duration of offers.
A transaction reduces 12,000 BTC margin
Historically, Bitfinex margin traders have been known to move large margin positions quickly, indicating whale participation and large arbitrage tables. In the most recent case on March 25, these investors reduced their 12,000 BTC long positions in a matter of minutes.
Bitfinex Long BTC Margin in BTC Contract | Source: TradingView
Despite the sharp drop, it did not affect the Bitcoin price. This supports the theory that such margin trading is market neutral, as borrowers do not use the gains to leverage their positions. There may be some arbitrage associated with derivatives.
Traders should cross-reference data with other exchanges to identify anomalies affecting the market as a whole, as each exchange has different risks, regulations, liquidity, and availability.
For example, OKX offers a margin lending metric based on the stablecoin/BTC ratio. Traders can increase their exposure on OKX by borrowing stablecoins to buy Bitcoin. Bitcoin borrowers, on the other hand, can only bet on falling prices.
OKX Stablecoin/BTC Margin Lending Rate | Source: OKX
The chart above shows that margin borrowing by OKX traders has held steady at close to 30 over the past week, indicating that professional traders have flattened their long-short bets. The data supports the hypothesis that Bitfinex’s decline was caused by the closure of arbitrage trades unrelated to Bitcoin’s price movements.
Recent cryptocurrency bank closures may have sparked the move
Another possibility for a sudden drop in margin demand is that $4 billion in deposits tied to Signature Bank have now lapsed. Cryptocurrency customers were asked to close their accounts in April, Bloomberg reported.
While New York Community Bancorp (NYCB) purchased most of Signature Bank’s deposits and loans on March 19, the agreement with the FDIC does not cover cryptocurrency-related accounts.
If these whales are forced to close their bank accounts, they will likely reduce their arbitrage positions, including those in margin markets. Right now, all assumptions are speculative, but one thing is certain: the drop in Bitfinex’s 12,000 BTC long margin has had no effect on Bitcoin price.
- Seoul Southern District Court Denies Arrest Request for Terraform Labs Co-Founder Daniel Shin
- Whale activity could prevent Bitcoin from reaching $30,000
- Bitcoin is still in a “safe haven phase”
front page
As reported by Cointelegraph
