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Bitcoin bearish sentiment strengthens

26 Apr, 2022
Bitcoin bearish sentiment strengthens

Short-term Bitcoin holders whose coins have been on their wallets for less than 155 days have already locked in any losses for the most part. Many of them have now switched to short positions on Bitcoin futures in the hope of making a profit on falling crypto prices. Futures contracts provide a way of buying and selling cryptocurrencies without actually taking possession of the physical coins.

Any futures contracts held can be charged a commission, which can be either positive or negative. Over the weekend, the funding rate on derivatives exchanges went into negative territory. This would suggest the market is oversold, with an overweighting of sellers willing to pay commission for holding short positions.

Image source: coinglass.com

Furthermore, TSD analysts report that the ratio of long to short positions is up from 1:1, when Bitcoin's price was at $47,000, to 1:3.5 at current prices. The probability of the price dropping to a nine-month low of $35,700 has risen sharply.

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Despite the protracted correction, mining difficulty increased by 4% two days later to set a new all-time high. Publicly-traded mining companies are to blame for the disconnect between difficulty and price. In their efforts to constantly attract investment capital, they are updating their ASICs fleet, even if this means they will experience losses. One prominent example of this phenomenon would be Riot Blockchain, which is planning to increase its computational capacity from 3 EH/s to 12.8 EH/s. In the chart below, you'll find a year-by-year breakdown of the mining return/profit ratio.

Image source: tradingview.com

Top-of-the-range ASICs enable firms to generate a return in times of low prices and rising difficulty. Currently, the cost of mining one Bitcoin is estimated to be $33,000.

 Image source: twitter.com/venturefounder

This enables companies to maintain a high hash rate while also using some of the coins they mine to cover operational expenses. A potential correction to around $35,000-$36,000 would not have a significant impact on major miners' activity.

The most likely cause of such a decline would be a significant interest rate hike by the US Federal Reserve in early May. Such a move would see the US dollar strengthen against most other instruments with which it is paired for trading purposes. This is the precise reason why there is a proliferation of speculators opening short positions on Bitcoin.

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