Bitcoin price rally to $42K is driven by spot volumes, not BTC futures liquidity.
Over the past seven days, Bitcoin (BTC) has experienced a massive 14.5% surge, hitting a 20-month high of $41,130 on December 4, prompting speculation from traders and analysts, especially after the $100 million short-term drain. (bearish) Bitcoin futures in just 24 hours. However, when we delve into BTC derivatives data, a different story unfolds—one that puts the spotlight on spot market action.
BTC liquidity map
Enough shorts to run up to $45-46k pic.twitter.com/7O2zYD4j8Q
— Nik Algo (@nik_algo) December 4, 2023
The impact of recent liquidity in Bitcoin futures markets
As the Chicago Mercantile Exchange (CME) trades USD-denominated contracts for Bitcoin futures, with no physical Bitcoin changing hands, these futures markets undoubtedly play an important role in shaping spot prices. Bitcoin futures, with a total open interest of $20 billion, show high interest among professional investors.
During the same seven-day period, more than $200 million worth of BTC futures shorts were released, which is only 1% of the total outstanding contracts. This figure pales in comparison to the peak trade volume of $190 billion during the same time frame.
Even if it only focuses on the CME, which is known for inflation in trading volume, its daily volume of $2.67 billion should have easily absorbed $100 million of 24-hour liquidity. This has led investors to wonder if the recent rally in Bitcoin was based on a few whale targets in the futures markets.
$BTC next possible plan
We see a quick wick up to 42k-42.5k to hunt BSL Of Shorts followed by a quick flow of longs and $BTC back to 39k-38.5k
A recovery to 39k-38.5k would be a good buying opportunity, up to 45k-47k before EFF confirmation.
— VeLLa Crypto (@VellaCryptoX) December 4, 2023
It may attempt to measure the volume of liquids at various rates using tape reading techniques. However, this approach fails to consider whether whalers and market makers are sufficiently hedged or have the capacity to make additional margins.
Despite Bitcoin's 20-month high, the futures and options markets look relatively subdued. In fact, three key lines of evidence suggest that if Bitcoin were to break above $43,500, there is no compelling reason to assume that short-term contract liquidations would occur.
Bitcoin derivatives show no signs of over-optimism.
Perpetual contracts, also known as reverse swaps, typically include an embedded price that is calculated every eight hours. A positive funding ratio indicates increased leverage among long positions, while a negative ratio indicates increased leverage among short positions.
The data showed an eight-hour high of 0.04% on December 4, but this level, equivalent to 0.9% for the week, was short-lived. The current weekly rate of 0.4% indicates a lack of urgency among retailers. On the contrary, there is no sign of fatigue among the bears.
To assess whether Bitcoin perpetual swaps represent anomalies, attention turns to BTC monthly futures contracts, preferred by professional traders for their consistent funding history. Typically, these contracts are sold at a premium of 5% to 10% to achieve their extended settlement period.
Related: How to prepare for the next crypto bull market – 5 easy steps
BTC fixed-term futures data showed a 12% premium on December 4, now resting at 11%. This level remains reasonable, especially in light of the ongoing bullying activity. In the year Historical rallies in 2021 have seen premiums increase by more than 30%, further challenging the idea of a rally led by Bitcoin derivatives.
Ultimately, with the price of Bitcoin up 14.5% in seven days and an estimated $200 million in short contracts being liquidated, bears have used conservative leverage, or diligent margin, to maintain their position.
When looking at the funding rate and the futures basis rate, there is no clear indication that a break above the $43,000 mark will trigger significant stock losses.
Essentially, the recent expansion has found support in spot market stocks and reduced coin supply on exchanges. Last week, exchanges recorded a net flow of 8,275 BTC, according to Coinglass.
This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.
