A yet undiscovered indicator for Bitcoin
Bitcoin has become a popular speculative asset, dwarfing its real-world utility. It's constantly trending on Twitter, with people using various indicators to time the market. However, there exists one helpful indicator that seems to have escaped everyone's attention. It originates from the "old" world of regulated finance.
You're likely aware of the Bitcoin futures introduced by the CME Group towards the end of 2017. As with the majority of futures, the Commitments of Traders data is aggregated and published weekly by the CFTC. We have found this data to be incredibly useful for Bitcoin. You just have to know what to focus on.
Contrary to commodities and even some other financials, the net positions aren't useful in this case. You can verify this for yourself in the free SpreadCharts app.
You need to switch to the net traders' indicator for large speculators within the app. This represents the number of speculators who are net short subtracted from the number of speculators who are net long. Consider it as the ultimate sentiment indicator of big players. Here's how it looks for Bitcoin futures.
There are several intriguing insights to be derived from this chart. Firstly, these large speculators primarily trade trend-following strategies. This is not surprising and aligns with the behavior of money managers in other markets. However, what's somewhat unexpected is their tendency to disengage prior to significant market shifts - both in 2021, ahead of a major peak, and in 2022, when Bitcoin was bottoming out.
That was the large futures contract, sized at 5 BTC. But there is also a smaller contract, known as Micro Bitcoin futures, with a size of just 0.1 BTC. Unsurprisingly, this contract is more popular and liquid than its larger counterpart. Here's the same net traders' data for MBT (the ticker for Micro Bitcoin futures).
You can notice two things. Firstly, more large speculators trade this smaller contract, which is good. The downside is that this contract was introduced much later than the larger one, resulting in a shorter history of available data.
The second point is that according to this data, Bitcoin is clearly getting overbought. We may soon witness a correction, which aligns perfectly with the short-term outlook we outlined last time.
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Disclaimer
All information in this post is for educational purposes only and is not intended to provide financial advice. If any financial instruments, strategies, securities, or derivatives are mentioned anywhere in this post, it is solely for educational purposes.
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