Bitcoin moves to higher territory but the initial traders are watching from the sidelines
Bitcoin (BTC) rose 8.4% between May 15 and May 16, hitting $66,750, its highest level in three weeks. Although Bitcoin has been stable around $65,000, this price reversal marks a reversal since BTC retested the $57,000 support on May 1. However, these gains were not enough to generate bullishness by Bitcoin derivatives metrics.
What's Behind Bitcoin's Inefficiency?
Part of Bitcoin investors' frustration may be due to the strong performance of traditional assets. The S&P 500 index hit an all-time high on May 16, a 15-day gain of 6%. Meanwhile, gold has gained 4% over the same period and is currently trading at $2,375, less than 1% off its all-time high closing price.
Bitcoin needs to rally another 12% to reclaim its highest closing price of $73,084. This success seems unlikely as the main price driver, namely the influx of Bitcoin exchange-traded funds (ETFs), has disappeared. These ETFs have taken in $12.1 billion in investments since their launch in January, but have been stagnant for the past two months.
The worsening regulatory environment, particularly in the US, may explain why investors are hesitant to buy bitcoin despite recent price strength. On May 6, US Commodity Futures Trading Commission (CFTC) Chairman Rustin Behnam warned that more enforcement actions will be taken against the crypto ecosystem in the next six months and two years.
Additionally, US regulators have several pending cases against crypto companies, including Binance, Coinbase and Kraken. Privacy-focused services and recent enforcement actions against broker-dealers such as Robinhood have also contributed to the uncertainty. Lack of a clear legal framework and legal transparency limits the appetite of Bitcoin investors.
Moreover, cryptocurrencies received negative media attention after 193 suspects were arrested in China for money laundering using stablecoins. Officials said on May 15 that these individuals transferred $1.9 billion in statiscoins to move goods and investments abroad. Additionally, on May 1, two US senators called for an investigation into the use of cryptocurrencies to finance terrorist organizations in the Middle East.
Bitcoin derivatives are flat despite the rally above $66,000.
To understand whether whale sentiment has been affected by the worsening regulatory environment, one must analyze data from the BTC futures markets. Top traders' long-to-short ratios consolidate positions in spot, perpetual and quarterly futures contracts, giving traders an overview of how bullish or bearish they are.
On OKX, the current long-to-short ratio stands at 0.96, indicating that bulls and bears have roughly equal positions. However, this is less optimistic than May 14, when the indicator stood at 1.25, preferring longs. At the same time, Binance's top traders are very small compared to May 14, as the long-to-short ratio has dropped to 1.14 from 1.31.
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To assess the appetite of retail traders, one must focus on futures, also known as reverse swaps. These contracts include an embedded price that is recalculated every eight hours to compensate for demand imbalances. Essentially, a negative rate indicates a preference for leverage used by shorts (sellers).
Note that Bitcoin's funding rate has remained below 0.01% for the past month, indicating balanced interest between longs and shorts. According to derivatives benchmarks, even the recent rally above $66,000 failed to instill confidence in retail traders.
Basically, investors are less confident in making bullish bets amid continued regulatory uncertainty. On the bright side, if Bitcoin finally breaks above $68,000, most traders will be caught off guard, potentially fueling the rally as there is room for bullish leverage.
This article does not contain investment advice or recommendations. Every investment and business activity involves risk, and readers should do their own research when making a decision.
