Did Omicron Or A Bitcoin Futures Short Last Week Trigger A Weekend Selloff?

A crypto flash-crash on Saturday attributed to Omicron uncertainty, fears of further Fed tapering, and a $500 million bitcoin sale that triggered cascading liquidations caused bitcoin to reach a low of $42,330, while ether dipped to $3,575 before both currencies partially recovered – they are presently trading at $51,500 and $4,358, respectively.

There were some warning signals. For instance, in a piece published two days before the drop in prices, a Forbes analysis of Commodity Futures Trading Commission (CFTC) weekly detailed how wealthy retail traders took out a heavy short position collectively worth $500 million at the same time Omicron was capturing headlines. The notional sum of this bet was not sufficiently large to move tens of billions of dollar’s worth of bitcoin daily trading volume, but it was an indicator of the overall negative sentiment going into the weekend and its notorious thin liquidity.

That said, these traders did not exactly profit from the weekend’s fall in prices.

The latest CFTC Commitments of Traders (COT) report released on Sunday confirms that the retail traders in the big-short story ultimately lacked bearish conviction – the abnormally large retail short positions closed by Tuesday November 30. Retail traders placed their short while bitcoin was in the $56,000 to $60,500 range and closed it somewhere within the $53,000 to $59,000 range, meaning that they could have earned a small profit. This bet’s short timeframe is in line with a slightly longer one seen in October when this same group initiated a large buy (long) bitcoin position. These traders appear to follow an agnostic long/short trading approach, lasting one to two weeks. This contrasts for example with asset managers who these days are long-only.

Winners and Losers Sometimes Revealed

So if retail traders didn’t exactly profit from the major volatility, who may have done so? The answer appears to be commercial traders, which are expert financial intermediaries who help third parties offset trading risk and in this instance could have scored opportunistically.

In something of a rare instance of counterparty transparency, last week’s data showed the likely trading counterparty of retail traders for the big sell (short) positions, something that is hard to know because it is an electronic, anonymous market. All futures trading at the CME exchange requires that buy orders at a given price be matched to seller orders. For the said retail drop in short contracts, another entity had to more or less simultaneously close long contracts and/or boost their short position. The latest Forbes analysis showed how commercial traders cut back long bitcoin futures (see reduction in spread open interest contracts) and boosted shorts by an equivalent number of contracts that short retail traders reduced.

The biggest winners this past week in the futures market were, nonetheless, hedge funds. But they could not have realized a profit until the futures market opened on Sunday at 6PM Eastern time, but by then bitcoin had bounced back to $47,000 from its $42,330 low.

Outlook

Bitcoin is not out of the woods yet and is subject to selloffs in the broader market, but sentiment improved as it became known that the El Salvadorian government bought the dip in bitcoin price. From a technical perspective, the recent $42,330 low was higher than the most recent low of $39,600 on Sep 21 and this bodes well for bitcoin bulls who are likely to stage a gradual challenge to the $55,000 and $60,000 levels before year end.

It is appropriate to note that it is precisely in times like these – when an attractive asset undergoes temporary volatility but remains on an upward trend – that shrewd long term investors can buy attractive securities on the cheap. Besides bitcoin, several cryptos and crypto mining stocks have seen sharp drops and it wouldn’t be surprising if they become someone’s belated Cyber week special.

Bitcoin: $51,000 – off 26% from Nov 10 high

GBTC: $38.40 – off 28% from Nov 9 high

MARA: $41.81 – off 45% from Nov 12 high

MSTR: $596 – off 33% from Nov 9 high