Help section is under contruction After the launch of datamish.com I have received a lot of questions about the graphs. In this guide I will give a tour of the site and explain how the data can be useful for traders. I will use Bitcoin in examples, but the principles apply no matter what cryptocurrency tokens you are interested in.
This guide is currently under construction, and more sections will be added at a later date. Until then please use the question marks above the different graphs to get more information about them.
Margin trading on Bitfinex
Bitfinex is one of the most important cryptocurrency exchanges in the space. Bitfinex offers traders to trade on margin, meaning you can open long or short positions using leverage. Bitfinex also has a lending market where users can earn interest by lending out their USD or Bitcoin. This is a nice option if you know you won't be trading for a period of time.
This site is only possible because Bitfinex offer a lot of in depth information about the market via their API’s. Not many legacy markets make this much data available to the public, so hats off to Bitfinex for providing us with this!
There are many other cryptocurrency exchanges that offer rich API’s, and Datamish already include some data from Bitmex (more will be added in the future). However the way the market is structured on Bitfinex makes it ideal for sentiment analysis, and this is the reason why Datamish has a strong focus on that exchange.
Margin positions and leverage
When trading on margin you can go long if you believe price will appreciate or go short if you believe price will depreciate. You will either loan USD for long positions or you will loan Bitcoin if you want to short.
On Bitfinex you can borrow up to three times what you have in your account. This is called leverage. So if you have 10,000 USD in your margin account you will have a tradable balance 30,000 USD for a long position or the equivalent in BTC if you want to go short. This is unlike spot trading where you are not able to borrow money for your positions.
Weak hands and sentiment
Leverage is a great way to increase profits, but it is also more expensive (fees+interest) and introduces the risk of getting a margin call. In a margin call a position get liquidated if the loss is too big. So naturally it is a good idea to close a position before this happens.
Because of the risks leveraged traders have weak hands compared to traders that trade on spot (without leverage). You can argue that traders are further incentivized to close margin positions early because they require extra attention and because you have to pay interest on loans.
With these things in mind we can conclude that:
- To take a leveraged position you need a fairly strong conviction that you are right about market direction. Tracking changes in margin positions over time can tell us something about changes in sentiment.
- Leveraged traders can easily be squeezed. In a short or a long squeeze leveraged traders will frequently panic close their positions in order to avoid forced liquidation or further loss.