Margin trading allows an investor to borrow money or cryptocurrency to take advantage of their trading position and increase the volume or expected return. For example, lending Tether (USDT) will allow a person to buy bitcoin (BTC), thus increasing the risk. Although there is an interest rate when you borrow, the trader expects that the higher BTC interest rate will compensate for this.
New traders may not be aware of this, but investors can borrow BTC to trade on margin in a short position, thus betting that the price will fall. This is why some analysts track the total loan amounts from Bitcoin and Tether to see if investors are leaning towards the positive or the negative.
Interestingly, the data show that while the price of bitcoin aims to reach a full-time high, the BTC / USDT loan ratio at OKEx reached its lowest level since November 20, 2020. Although this figure is still in favor of bulls. This raises questions about which triggers are behind the movement.
Bitcoin exchange rate in USD (top) and USDT / BTC lending rate (bottom). Source: TradingView, OKEx
When traders borrow USDT or other stable currency, they are likely to use it for long-term cryptocurrencies. On the other hand, BTC loans are mainly used for short positions.
This means that in theory, the higher the USDT / BTC lending rate, the market tends to be bullish. The opposite movement indicates an increased demand for Bitcoin shorts.
As shown in the chart above, there were almost eight times more loans in USDT on OKEx than in Bitcoin. Although there is potential on the upside, it is close to the lowest level since November 17, 2020.
The loan rate for bears has never been so high
In contrast to permanent futures contracts (reverse swaps), margin trading is traded on the regular spot markets. To start trading on margin, the trader only needs to transfer the deposit funds to the margin account. Most exchanges offer 3 to 10 times leverage, depending on volatility and market conditions.
That number has halved since the end of February, despite BTC having a record high of $ 61,800 and a daily light that closed above $ 55,000 in the last 17 days. However, a higher bitcoin lending rate will undoubtedly lead to a reduction in the price of bitcoins, resulting in lower leverage.
Bitfinex BTC Short-term lending rate. Source: BFX Quotes
According to Bitfinex data, BTC’s short-term lending rate has fallen to 1% annually. Therefore, the higher costs are definitely not behind the much smaller bitcoin lending business. Although OKEx does not provide maps, data from Coinlend, Poloniex and Quoine show a similar trend.
The bulls maintained their long positions despite increased commissions.
Traders who bet on negative price fluctuations must borrow BTC to trade short on margin. Nevertheless, they will still have to pay interest and trade in USD or stack coins. To terminate the agreement, the buyer must repurchase the BTC, in the hope of a lower interest rate, and return it to the lender with additional interest.
This time, in mid-March, there was a big jump in the lending rate in US dollars when bitcoin exceeded $ 60,000. The long-term leverage frenzy quickly returned as BTC plunged 13% in the next few days, resulting in the normalization of stable lending rates in fiat and foreign currency.
Traders who want to borrow US dollars or stack coins to buy bitcoins have paid between 15% and 23% annually for the past two weeks. This speed is probably the reason why the loan relationship OKEx USDT to BTC failed despite the high price of bitcoin.
Currently, the lending rate is favorable for the bulls.
The meager 1% annual fee was not enough to entice borrowers to sell bitcoin, which is a positive sign. If there was demand for it, the borrowing rate would increase.
As such, traders should not be aware that OKEx’s margin lending rate is at its lowest level in five months, which is a bearish signal.
While the margin of 23% for purchase periods is generally high, there is room for further use. Therefore, Bitcoin’s support level of $ 60,000 should come as no surprise.