Why did 12K Bitcoin margin longs close at Bitfinex, and why didn’t it impact BTC price?

Since May 2022, the Bitcoin (BTC) margin markets on the Bitfinex exchange have been plagued by an unusually high open interest of over $2.7 billion. This information alone should raise a red flag, especially in light of Bitcoin’s price decline from $39,000 to less than $25,000 during the same period.

Traders seeking to leverage their cryptocurrency position had borrowed over 105,000 Bitcoin. Currently, the cause of this anomaly is unknown, as well as the number of entities involved in the trade.

Cheap borrowing favors high demand

Bitfinex’s sub-0.1% annual rate may be a contributing factor to the size of the Bitcoin lending market. To date, this has been the norm and it creates enormous incentives for borrowing, even if there is no current need. There are few traders who would turn down such a ridiculously inexpensive leverage opportunity.

Margin borrowing can be used to take advantage of arbitrage opportunities, where a trader exploits price discrepancies between different markets. For example, borrowing Bitcoin on margin allows a trader to take a long position in one market and a short in another, profiting from the price difference.

To understand how Bitcoin borrowing can be used to profit on derivatives markets, including those outside of Bitfinex, one must understand the distinction between futures contracts and margin markets. The margin is not a derivative contract, so the trade occurs on the same order book as spot trading. In addition, unlike futures, margin longs and shorts are not always in balance.

For example, after purchasing 10 Bitcoin using margin, the coins can be withdrawn from the exchange. Naturally, the trade, which is typically based on stablecoins, requires some form of collateral or a margin deposit.

If the borrower fails to return the position, the exchange will liquidate the margin in order to repay the lender.

Additionally, the borrower must pay interest on the BTC acquired with a margin. The operational procedures vary between centralized and decentralized exchanges, but the lender typically determines the interest rate and duration of offers.