Bitcoin Futures Interest Opens Near $24B Level ‘Alert Raise’ – Are Bulls Risky?
Bitcoin (BTC) took a shot at $53,000 on February 20th, briefly surpassing $52,900. However, despite the drop to $50,750, Bitcoin futures open interest remains at $23.7 billion, which is 2.5% below the all-time high in April 2021.
In the year April 2021 open interest rose to $24.3 billion but failed to break the $64,900 resistance, resulting in a 27% correction in 11 days. With the current strong demand for BTC futures contracts, investors are contemplating the possibility of a similar outcome.
Some traders argue that the increase in Bitcoin futures open interest indicates over-leveraging, but this is not universally true. Each derivatives trade requires a buyer and a seller of the same size and an investor can be fully hedged even when using leverage, such as buying monthly BTC futures and selling the equivalent perpetual contracts at the same time if there is a favorable price differential.
The profile of Bitcoin futures traders has changed over time
Open interest's historic high of $24.3 billion does not carry much weight on its own. In the year In 2021, Binance, fueled by retail flows, will lead the BTC futures market share, while the current dominance is held by CME, which consists mainly of institutional investors. While this information does not eliminate the possibility of a sharp Bitcoin price correction driven by volatile markets, it does reduce the likelihood.
A higher open interest increases the possibility of cascading liquidity, which is a valid point. However, for such conditions to apply, there must be significant credit in the system, a condition that is unlikely with CME contracts requiring a 50% deposit margin. Similarly, Deribit traders follow a more conservative approach compared to Bybit, resulting in different liquidity levels. Basically, it's not logically coherent to aggregate all BTC futures open demand as one pool.
Regardless of the benefit used, one can evaluate the optimism of professional traders by examining the future premium of Bitcoin. In regular markets, these contracts must trade 5% to 10% higher than regular markets to account for their extended settlement period.
Quoted as a base rate, the premium on Bitcoin's fixed-month contracts recently surged 17 percent on February 20 as the price neared $53,000. Currently, the indicator is 14%, which shows that the fall to $50,750 has not reduced the bullishness. In particular, these figures are annualized, which results in a price of 1.1% for holding a long position for a month.
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Bitcoin perpetual contracts did not have the same bullishness.
Interestingly, other metrics, such as perpetual contracts (inverse swaps), did not reflect the same bullish bias. These derivatives, also known as reverse swaps, generally include an embedded rate calculated every eight hours, indicating excess demand for long positions.
According to the data, BTC's funding rate for the past two days was 0.015%, equivalent to 0.3% for the week. Typically, in conditions driven by excessive optimism, the rate can easily exceed 1.0% per week. Therefore, traders using perpetual contracts do not exhibit the same brutality seen in the fixed-month market.
Considering Bitcoin's 4.2% price swing on February 20th and the fact that only $50 million was lost in long contracts, one can assume that the overall bullish interest was healthy. Moreover, the modest premium in BTC perpetual contracts negates any hypothesis of excessive leverage by retail traders. Therefore, there is no sign of a sharp correction triggered by long-term liquidity.
This article does not contain investment advice or recommendations. Every investment and business activity involves risk, and readers should do their own research when making a decision.
