Record $36 Billion Bitcoin Futures Open Interest Spurs Increased Market Volatility
Summary:
Bitcoin futures open interest reaches an all-time high of $36 billion, leading to increased volatility in spite of the recent U.S. launch of spot ETFs. Amid speculation over apparent 'manipulation', the futures market allows for sharp price corrections and subsequent gains, generating potential risks for leveraged buyers. Key indicators reveal a consistently high futures premium and a potential impact on short-term buying pressure.
Bitcoin (BTC) enthusiasts often anticipate volatility with enthusiasm yet find the aftermath of price surges and subsequent sharp declines, resulting in forced liquidations in future contracts, less appealing. Bitcoin futures, which allow for leveraged trading, exert more considerable price impact as this market expands. The total Bitcoin futures open interest hit an all-time high of $36 billion on March 21, an increase from $30 billion recorded two weeks before. The field's leading contender, the Chicago Mercantile Exchange (CME), recorded an $11.9 billion open interest, exceeding Bitcoin exchange-traded funds' spot inflow since their inception. Moreover, Bitcoin's volatility surged following the U.S. spot ETF launch, contrary to analyst predictions of reduced volatility due to daily trades of these instruments surpassing $3 billion. The cryptocurrency's 30-day volatility soared above 80%, the highest in over a year. In contrast, volatility in the S&P 500 index and WTI oil futures hovers around 13% and 23% respectively. Examples of Bitcoin volatility include a 10% price correction on March 19, followed by a 12% gain on March 20, leading to $375 million of forced liquidations in BTC futures contracts in two days. While this does affect the bull market's trajectory and broader market's risk perception, it does not directly impact BTC holders. Bearish and bullish bets in Bitcoin's futures market can be influenced by a leveraged derivatives instrument. Market makers' aggressive shorting of BTC futures, while fuelling volatility, must eventually be settled through either contract buybacks or forced liquidations. Hence, artificially lowered Bitcoin prices due to these practices will eventually reverse, leading to short-term purchasing pressure. However, some argue that this increased volatility is due to 'manipulation' and excessive leveraging. For example, user Amit Kukreja alleges that market makers have been alternating between shorts and longs. To affirm any manipulation claim, a closer look at the premium of monthly contracts, which professional traders prefer, is required. These contracts are typically offered at a 5% to 10% premium by sellers to account for the extended settlement periods. The BTC futures premium levels consistently exceeded 16% over the past three weeks, indicating a bullish trend. The Bitcoin price's continuous downtrend might lead to leveraged buyers facing forced liquidation, considering the substantial $36 billion open interest. This article is not an investment advice or recommendation. Investments and trading always involve risks, and readers are advised to carry out their own research before making any decision.
Published At
3/22/2024 8:51:22 PM
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