Research: Changes to BTC long/short margin positions can predict BTC price movements
One aspect of the crypto markets that more advanced traders look at is long vs short margin positions. In brief, a margin position is the result of a leveraged trade, where the trader effectively borrows an asset, with the goal to increase their potential rewards - while simultaneously increasing risk.
For example, if you wanted to bet against the BTC price (i.e. go short on BTC), you could effectively borrow 1 BTC from a funding market, sell it for USD, and then later buy it back to pay back your 1 BTC loan. A successful trade for you in this example would mean that the BTC/USD price went down - that’s how you’d secure a profit. Exchanges like Bitfinex, Bitmex, and Liquid offer their customers the opportunity to margin trade in this way.
We won’t go into the details on margin trading and long/short positions in this post. Instead, we’ll focus on our backtesting results from looking at BTC long/short margin positions vs BTC price returns.
Changes to BTC long/short margin positions can predict BTC price movements.
We follow a similar methodology as we did when researching abnormal ETH movements into / out of exchanges. Firstly, we have to define quantitatively what we mean by “changes to BTC long/short positions”.
Some of what we backtested in this analysis includes:
- % change in short positions within a time frame
- % change in long positions within a time frame
- Total amount of BTC in long positions
- Total amount of BTC in short positions
- Relative proportion of total margin positions that are long (vs those that are short)
We decided to stick to fairly simple and intuitive variables in this first iteration, but we might create more complex signals later on, depending on user feedback.
Secondly, we measure the correlations between certain trigger points in the variables above vs the daily returns of the BTC price; both same-day and 1-day lagged returns.
We should mention that we did not have historical data with low enough granularity to study the exact timing of retrospective triggers. Having said that, we’ve now set up a data pipeline where we have long/short data by the minute, which will allow deeper analyses in the future.
After backtesting >100 trading signal variants on the last 12 months, we found three that we decided to implement. Here’s an overview of the key metrics of those three variants:
BTC longs increase
71% (24 vs 10)
BTC shorts increase
68% (23 vs 11)
BTC longs dominate
68% (23 vs 11)
* The “Sell” signal from BTC shorts has historically only been temporary within the first 24 hours. Within the next 24 hours the price has historically recovered 62% of the time. By comparison, a significant increase in longs has been a consistent buy signal both in the first 24 hours AND in the next 24 hours.
As usual, we’ve left out results for signal variants that we chose not to implement. As you’d expect, the vast majority of the signal variants did not show any predictive power beyond what you’d expect from chance.
Here are some examples of how you’d see the signals in CoinFi Trading Signals:
1. BTC Longs Increase
"BTC long margin positions on Bitfinex have increased by X% in the last 24 hours. This signal has triggered X times in the last year, and predicted a BTC price increase X% of the time. Keep an eye on BTC volatility in the coming days."
2. BTC Shorts Increase
"BTC short margin positions on Bitfinex have increased by X% in the last 24 hours. This signal has triggered X times in the last year, and correlated with BTC price decrease X% of the time. Historically the price has recovered, but expect increased BTC volatility in the coming days."
3. BTC Longs Dominate
"BTC longs now dominate margin positions on Bitfinex with >X% long. This signal has triggered X times in the last 12 months, and correlated with BTC price increase X% of the time in the short term. Expect increased BTC volatility in the coming days."
Looking at historical correlations between BTC margin positions and short-term returns, we’ve seen that there are specific configurations that historically have predicted BTC price movements. As always, it’s important to look at the totality of the market when making trading decisions. However, we believe that these signals will help COFI stakers make better trading decisions.
You can stake your COFI here and get immediate access to all of our trading signals.