The amount of money allocated to short bets against bitcoin fell to a more than 6-month low during Tuesday’s trading session, data from the popular cryptocurrency trading platform Bitfinex reveals.
At 13:00 UTC today, the total funding in BTC shorts, or positions that would profit from a decline in the price of the underlying bitcoin asset, fell beyond the recent low of 18,992 BTC set this past November to reach 18,888 BTC – the lowest amount seen since Aug. 4, 2018.
The development comes a day after bitcoin’s price increased 8 percent, which likely trapped investors with a bearish outlook on the wrong side of the market, causing them to cover a large number of short positions.
Current figures show a 28 percent drop in the amount of funds in bitcoin shorts since the beginning of the day yesterday.
Interestingly, bullish bets on Bitfinex, known as “longs,” have also witnessed a sharp decline in the past 48 hours.
Data from Bitfinex further reveals the amount of BTC/USD longs have dropped by a similar 29 percent from yesterday’s high, which is likely a sign of investors are deleveraging, or taking profit after bitcoin’s near 18 percent price increase over the past 11 days.
As it stands, the ratio of long to short positions is 1.42 to 1, meaning there are 1.42 BTC in a long position per every 1 BTC is a short position on Bitfinex. The ratio is a slight decline from the most recent high of 1.54 to 1 set on Feb. 15.
As previous analysis from CoinDesk notes, an unusually high long/short ratio can be a sign of an impending “long squeeze,” or rapid covering of long positions which increases the rate at which price declines. However, the current ratio of 1.42 is lower than both the ratio of 1.8 to 1 set in August and the all-time high ratio of 3.74 to 1 set in February of 2018.
Disclosure: The author holds BTC, LTC, ETH, ZEC, AST, REQ, OMG, FUEL, ZIL, 1st and AMP at the time of writing.
Bullish bets on bitcoin, the world’s largest cryptocurrency by value, reached 11-month highs on Monday, according to the data from the cryptocurrency exchange Bitfinex.
The number of long positions on bitcoin’s US dollar-denominated exchange rate (BTC/USD) jumped to 38,237 BTC at 04:10 BTC – the highest level since March 30, 2018 – and were last seen at 36,176 BTC.
While long positions have risen by 35 percent in the last three weeks, short positions have remained largely unchanged. As a result, the long-short ratio, a barometer of market sentiment, has improved to 1.5 from 1.18.
The market mood has indeed turned bullish but hasn’t reached extremes, as long positions are still at least 8 percent short of the record high of 40,193 registered on March 26, 2018.
That said, BTC’s rally to 5.5-week highs above $3,900 has likely opened the doors to a convincing move above $4,000. That would only attract buyers, pushing BTC/USD longs to fresh record highs.
As of writing, BTC is changing hands at $3,912 on Bitfinex, the highest level since Jan. 10. The cryptocurrency would become vulnerable to “long squeeze” – a sudden pullback in prices due to an unwinding of long positions – if and when the bullish sentiment reaches extremes.
Disclosure: The author holds no cryptocurrency assets at the time of writing.
The ethereum-based token maker (MKR) is outperforming the broader markets with a 37 percent gain so far in February.
Ranked 16th by market capitalization on CoinMarketCap, 1 MKR was valued at 4.6 ETH on Feb. 14 – the highest level since Oct. 8 – and was last valued at 4.37 ETH. The pullback is likely associated with profit-taking following a jump to 129-day highs.
MakerDAO is a smart contract platform on the ethereum blockchain, backing the value of DAI (DAI) – it’s native stablecoin, which is backed by ether and is soft-pegged to 1 USD – through a system of Collateralized Debt Positions (CDP). This loan payment system uses ethereum’s ether (ETH) token as collateral, necessary for the governance of DAI throughout the Maker ecosystem.
Currently down 5.39 percent from its recent peak, MKR has still excelled over the month as it continued higher than the previous month’s peaks, a sign that the bearish market structure is beginning to falter.
Maker tokens are created or destroyed depending upon certain price fluctuations of the DAI coin in order to keep it as close to $1 USD as possible. The platform has been incredibly successful throughout the crypto bear market, with about 2 percent of all Ethereum now locked in MakerDAO loans.
The chart above demonstrates rampant fluctuations in MKR’s price since before the new year began, with a recent higher-high trend taking shape and the 2019 candles printing larger bodies as greater liquidity flows to the market.
Pooled Ether (PETH)
As part of the system, users pool their ether together automatically and receive DAI.
As of now, a total of 1,970,339.45 ETH are locked up in the primary Maker contract, representing roughly 1.87 percent of all 104,862,328 ETH in circulation – significantly higher than 1 percent seen in November.
DAI tends to be overcollateralized reportedly by more than 200 percent. So, for every DAI created, there is at least $2 to $3 worth of ETH stored in CDP. As a result, when ETH’s price drops, more of that cryptocurrency needs to be locked up in order to keep DAI collateralized. MKR tokens are also used to pay transaction fees on the Maker system and provide holders with voting rights within Maker’s ‘continuous approval voting system’.
MakerDAO made the decision recently to increase its stability fee from 0.5 percent to 1 percent in order to reduce and smooth fluctuations in DAI’s price peg of the USD, a welcome move seen by many as a positive step toward greater economic assurances and stability from the team.
Also of note Uniswap, an automated Ethereum exchange protocol overtook Ethfinex exchange this week as the number one venue for trading MKR/ETH, with over $329,000 in USD value traded over a 24-hour period.
The exchange offers a reduced price tag, while other exchanges have MKR listed at a premium, paving the way for arbitrage trading between Ethfinex and Uniswap.
Eventually over time that gap should begin to close its spread as buying on Uniswap and selling on Ethfinex will result in a price convergence in the long run, but for now, Maker has a chance to continue exceeding expectations.
Disclosure: The author holds no cryptocurrency at the time of writing.
Edward Woodford is the co-founder and CEO of Seed CX, which, offers a licensed exchange for institutional trading and settlement of spot digital asset products and plans to offer a market for CFTC-regulated digital asset derivatives.
The following is an exclusive contribution to CoinDesk’s 2018 Year in Review.
While 2018’s falling bitcoin prices led many observers to write off digital assets altogether, the correction should actually help force the market as a whole to mature.
That maturation is exactly what the space needs to attract more institutional investors, whose arrival en masse will improve the market for everyone by increasing liquidity, both directly, via the funds they invest, and indirectly, via the fact of their adoption. Their entry will signal to other traders that the market is stable and trustworthy.
Taking risk seriously
Between 2015 and late 2017, when the price of bitcoin was steadily rising, there was bullish euphoria in the market. Traders were willing to rely on little-known or unregulated exchanges despite the risks – the potential upside made those risks worthwhile.
In the early days, digital assets presented a unique scenario by conventional trading standards: the operational risk (risk of loss from inadequate procedures, security, and policies used to conduct operations) of trading was greater than the market risk (risk of financial loss due to the prevailing conditions of a market an investor is invested in).
Loss of some money (or digital assets) here and there to hacking, for example, could be outweighed by the fact that returns were astronomical and investors were indifferent to the price of bitcoin and other digital assets as it was increasing, exponentially, in a very short period of time. For example, bitcoin experienced a price increase of 460+ percent over the six-month period from July 1, 2017 ($2,492.60) to January 1, 2018 ($14,112.20).
Trading on platforms with very high operational risks could be entirely logical using an “adjusted” Sharpe Ratio, a risk-weighted measure. The adjusted Sharpe Ratio would take into account the return of investing in bitcoin over a period of time and the risk-free rate of investing in a risk-free asset (such as a U.S. Ttreasury bond) and determine the risk of the portfolio (market and operational risks) to determine the risk-adjusted return.
Using the example above, taking a risk-free rate of approximately 1.5 percent, the portfolio’s return, which exceeds 460 percent, and the portfolio’s risk of, let’s say, 135 percent (35 percent for market risk and 100 percent for operational risk), would yield a Sharpe Ratio of approximately three. This Sharpe Ratio would represent an attractive risk-weighted return as the return exceeds the risk by a multiple of three.
Today, returns have normalized for arbitrage opportunities as liquidity has increased across exchanges. Those who employed a purely long strategy and enjoyed exponential returns would now be experiencing losses if employing the same strategy over the last six months.
Aside from a purely directional strategy, traders will tell you that “easy returns,” such as simple arbitrage opportunities (buying the same asset on one exchange and selling it at a much higher price on another) have disappeared. When the returns they’re seeing are closer to what they’d expect from more established asset classes, traders’ willingness to accept the op-risk, or potential of losses from hacking and other preventable causes, is greatly diminished.
In short, the change to the risk-reward ratio means that exchanges are no longer given a pass for poor operations, lax security, troubling conflicts of interest, and insufficient oversight.
For example, most exchanges use a single wallet to hold assets for all participants. Even with the bulk of assets held in cold storage, a single wallet creates a tempting target for hackers and other criminals. Now, we’re seeing more exchanges introduce segmented wallet infrastructure (as at Seed CX, where we create a dedicated wallet for each exchange participant).
This attitude shift means exchanges that offer dedicated wallets and other security-focused features – those that have the lowest operational risk – will attract more institutional investors, who must consider not only financial and operational risks but also risks to their reputation when trading digital assets.
It also means exchanges have to offer the surveillance and account infrastructures required to prevent inefficient or suspect trading: trade alerts, circuit breakers, order book audit trails, and so on.
As we mentioned above, changes in the market since 2017’s rally mean that “long-only” strategies are no longer workable and “easy return” opportunities are much harder to come by because more groups are chasing the same opportunities. For example, DeVere Capital recently announced the launch of an actively managed cryptocurrency fund that will be focused on arbitrage opportunities between exchanges.
This means exchanges that want to attract and keep traders must build the infrastructure to offer more sophisticated trading strategies, including swaps, derivatives, and options, not to mention combinations of those and spot markets.
Legacy of the bear
The transformation of the market infrastructure still has an overhang of its history. In the first three quarters of 2018, hackers stole $927 million of cryptocurrency from exchanges and other trading platforms.
And while many exchanges still fall short on security measures, others are making significant strides forward. In addition to segmented wallets, we’re seeing greater use of multi-signature security (at Seed CX we require two keys, generated by independent parties, to access wallets), more enforcement of whitelisted withdrawal IP addresses, and the increased pursuit of regulatory licenses.
Two years ago, the entrance of institutional investors to the digital asset space seemed distant and unlikely. Today, thanks to falling prices, institutional investors are not only entering the market but are increasingly dictating the terms of the marketplace – to the benefit of everyone trading in it.
Starting today, CoinDesk will use GitHub to help crowdsource potential methodology changes and data sources for our Crypto-Economics Explorer (CEX), our comprehensive data tool designed to measure and compare crypto assets.
After we launched the beta version of our tool in November, the clearest critical comment we heard was related to our methodology for calculating developer interest in a blockchain. More precisely, we heard feedback on the decision to only count activity on one GitHub code repository toward each blockchain’s “developer score.”
The critique was that the methodology behind the CEX was insufficient to measure developer interest across each project.
As an example, bitcoin’s reference implementation is Bitcoin Core (which is the repository the CEX tracks). While that works fine for bitcoin, ethereum is implemented through several clients, which includes the largest repository (Geth, which we track), but also the independently developed, interoperable, but equally important Parity client (whose repository is not currently tracked in the CEX), as well as clients such as cpp-ethereum and still others.
By counting bitcoin’s single client, critics said the CEX painted a more accurate picture of developer interest in bitcoin, but by counting only one client for ethereum, the explorer missed out on some of the developer interest on that blockchain.
Our logic for the conservative approach was that we wanted to get the beta version of our tool off the ground with a lowest common denominator — developer interest in core protocols as implemented in their principal client. Comparisons of highly heterogeneous blockchains is a challenge and we wanted to have a solid foundation before we expanded data points and methodology any further.
The plan from there was, and is, to grow the list of code repositories we track. Our ambition is to soon track GitHub activity beyond the core protocol and client implementations all the way to associated projects built off of that blockchain, including wallets, dapps and layer-two solutions like state channels and sidechains.
After we launched and heard the criticisms, we set out to implement our full vision and expand the repos and activity on GitHub we tracked. When we started, however, we quickly realized the complexity of this task. What we wanted to do meant tracking thousands of projects and repositories. What we needed was a solution that could scale to the complexity and size of the industry and that could capture developer interest and activity in a blockchain from “head to toe.”
Our solution is now to go directly to developer communities, enabling the coders powering various blockchains to provide their input on our methodology in a setting that’s most apt given their work.
That is, Coindesk Data has now published the methodology and data sources for the CEX’s developer interest in GitHub itself.
There are several master files in our new repository to get the effort launched: one for the repos we currently track, another for the weights we give each data point, and finally another for the methodology of how to integrate associated projects in the future.
The goal is to use GitHub’s workflow tools to help us scale this important metric. Now, anyone can make a pull request for CoinDesk Data to follow a repository, to change weights given to a certain data point or to help inform any larger methodology change.
The hope is that this forum will help us harden the methodology, spark debate and scale our coverage to every corner of GitHub related to our industry. We look forward to your continued feedback.