Bitcoin Futures Indicate Bullish Sentiments Despite Market Corrections
Summary:
Bitcoin briefly approached $53,000 on February 20 but retreated due to $50 million in leveraged long liquidations. Despite this, Bitcoin's futures open interest remains steady at $23.7 billion. The change in Bitcoin futures traders from mostly retail flow to institutional investors indicates a lower likelihood of a sharp Bitcoin price correction. Moreover, perpetual contracts do not show the same bullish bias observed in fixed-month markets, signaling a lesser likelihood of extreme optimism among traders.
On February 20, Bitcoin (BTC) attempted to break the $53,000 mark, coming close at $52,900 before falling due to $50 million in leveraged long liquidations. However, despite a drop to $50,750, Bitcoin's futures open interest still stands strong at $23.7 billion. This is only a comparatively small 2.5% decrease from its highest level during April 2021. Back then, the open interest figure had reached a record-breaking $24.3 billion but failed to overcome the $64,900 resistance, causing a 27% decrease in just 11 days. Given the current demand for BTC futures contracts, investors are considering whether they might see a similar situation unfold. Some traders suggest that the upsurge in Bitcoin futures open interest indicates unwarranted borrowing, but this isn't always the case. Every derivatives transaction involves a buyer and a seller of equal size, and even with leverage, an investor can be fully hedged.
It's noteworthy that over time, the nature of Bitcoin futures traders has evolved. Back in 2021, Binance, powered by retail transactions, led the BTC futures market share. Now, CME, consisting mainly of institutional investors, holds the upper hand. This changes the risk of a drastic decline in Bitcoin prices caused by derivatives markets. Although high open interest could trigger a chain reaction of liquidations, this is less likely with CME contracts that require a 50% deposit margin.
One way to gauge the optimism of seasoned traders is to look at the Bitcoin futures premium. Ordinarily, these contracts should trade 5% to 10% above regular spot markets due to their longer settlement period. As of February 20, the premium for the Bitcoin fixed-month contracts reached an all-time high of 17% as the price neared $53,000. Right now, it stands at 14%, suggesting that the fall to $50,750 didn't squash bullish sentiments.
Interestingly, other metrics like perpetual contracts didn't reflect the same bullish outlook. These derivatives recalibrate every eight hours, signaling a high demand for leveraged long positions. But data shows that BTC funding rates have remained mostly flat for the past few days. In scenarios driven by extreme optimism, the rate can easily surpass 1.0% per week. Hence, traders using perpetual contracts didn't portray the same bullishness seen in the fixed-month markets.
Given Bitcoin's 4.2% price change on February 20 and the liquidation of only $50 million in long futures contracts, one can deduce that overall bullish leverage remains strong. Moreover, the modest premium in BTC perpetual contracts dismisses any assumptions of excessive leverage from retail traders. Therefore, there doesn't seem to be any sign of an immediate severe correction caused by leveraged long liquidations. This article does not offer investment advice or recommendations. Every investment and trading move involves risk, and readers should undertake their own research when making a decision.
Published At
2/20/2024 10:25:59 PM
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