Bitcoin Hits All-Time High But Steep Rise in Futures Contracts Stirs Volatility Concerns
Summary:
Bitcoin (BTC) has reached an all-time high of over $72,000, recording a 9.5% increase over the past week. Despite the achievement, Bitcoin enthusiasts are cautious due to a significant surge in leveraged BTC futures contracts demand. Current Bitcoin futures amount to 495,380 BTC, enough to cause volatility spikes. The current 21% futures premium suggests extreme optimism, yet considering the recent 40% BTC price increase, it might not be unsustainable. Retail trades over $72,000 could trigger more volatility as market makers and arbitrage desks might cash in on these over-leveraged positions.
On March 11, Bitcoin (BTC) reached a historic high of over $72,000, representing a 9.5% surge in the past week. The fluctuating journey saw it jump 4.8% to reach $70,055 on March 8, then drop to $65,935 - a decrease of 5.9%. Given the steep increases in demand for leveraged BTC futures contracts, Bitcoin enthusiasts are hesitant to rejoice at this record-breaking high.
The Bitcoin futures market's $35.8 billion open interest landscape points to potential risk, as traders commonly depend heavily on leveraged positions.
Bitcoin futures accumulated open interest, USD. Source: Coinglass
Such data signifies investor enthusiasm but is not necessarily a bullish sign as futures buyers and sellers are always balanced, leading to spikes in volatility rather than a clear directional bias.
Notably, the top spot in Bitcoin futures is now held by the Chicago Mercantile Exchange (CME), surpassing major crypto exchanges like Binance, Bybit, and OKX - a stark shift from November 2021. At that time, peak Bitcoin futures open interest coincided with BTC's near-$69,000 trading price, which was followed by a 31.5% dip in just a month.
When expressed in Bitcoin, the futures open interest is 27% lower than its October 2022 peak. However, current BTC futures open interest of 495,380 BTC could spark significant volatility given the fluctuating BTC pricing. This was apparent on March 4, when swift long and short leveraged BTC position liquidations amounted to a shocking $325 million.
To determine if the leverage demand leans more towards purchasing, Bitcoin's monthly futures contracts should be scrutinized. Usually, futures contracts trade at a slight premium to spot markets as sellers demand a higher price to delay settlement. Under normal conditions, BTC futures should see an annualized premium of 5-10%, a typical market situation known as contango.
BTC 3-month futures annualized premium. Source: Laevitas.ch
Recent data shows increased demand for leveraged BTC longs, breaking the 10% neutral line four weeks ago and peaking at a record 23%. The current 21% level might suggest over-optimism. However, given the 40% BTC price increase within two weeks, it would be premature to label the current futures premium unsustainable, considering past bull markets have seen premiums above 45%.
Trades over $72,000 by retail investors could bring further volatility. The funding rate for Bitcoin futures perpetual contracts rose to a peak of 2.1% per week on March 11, unseen in over 18 months. These contracts are favored by retail investors as they mirror spot market prices closely but carry a variable leverage fee.
Bitcoin perpetual futures 8-hour funding rate. Source: Laevitas.ch
Meanwhile, spot exchange-traded funds (ETFs) have strong inflows and firms like Microstrategy continue buying regardless of the soaring BTC prices. If retail investors decide to participate in these highly-priced perpetual contracts at $72,000, however, volatility may skyrocket as market makers and arbitrage desks take advantage to profit from these over-leveraged positions.
While Bitcoin's price cannot be massively influenced by few players in the long run, investors maintaining bullish bets by paying 2.1% weekly could instigate a significant liquidation wave should a price dip occur. Yet, with steady ETF inflows, it's less likely to foresee a significant price fall based solely on leverage issues.
This article is not intended to serve as investment advice or recommendations. Every investment and trading move carries a certain level of risk. Hence, readers should conduct their independent research when making a financial decision.
Published At
3/12/2024 12:01:52 AM
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