The price of Bitcoin (BTC) has been on a downward trend since reaching $70,300 on May 27. It is currently sitting around $67,500, marking a 4% drop in just two days. However, despite this correction, the support at $66,000 has remained strong since May 17, providing some reassurance to bullish investors.
The concerning data comes from the Bitcoin derivatives markets, where the open interest, which represents the number of BTC equivalent leverage bets, has reached a 16-month high on May 29.
Investors have been shifting away from fixed-income positions and showing a preference for Bitcoin due to macro trends. The S&P 500 is only 1.2% below its all-time high, indicating a robust stock market. Additionally, the 5-year Treasury yield has increased, suggesting traders are moving away from fixed-income positions.
This shift in investor behavior was particularly noticeable following a weak demand at a Treasury Department auction on May 28, which caused concern among stock investors.
On May 29, the aggregate Bitcoin futures open interest reached 516k BTC, the highest since January 2023, and a 6% increase over the past week. The Chicago Mercantile Exchange (CME) leads the market with a 30% share, followed by Binance with 22% and Bybit with 15%. This substantial open interest, equivalent to $34.8 billion, can be both positive and negative for the market.
While high open interest indicates a bullish sentiment and strong appetite for Bitcoin futures, excessive reliance on leverage can lead to cascading liquidations and exacerbate price drops. However, Bitcoin’s price has shown resilience since regulatory pressures in the United States have eased.
Positive regulatory developments, such as the approval of a spot Ethereum (ETH) exchange-traded fund, the Senate’s vote to repeal the Securities and Exchange Commission’s proposed SAB 121 accounting rule, and Congress passing the FIT 21 reform, have favored Bitcoin bulls.
In terms of Bitcoin futures, the funding rate for perpetual contracts is currently at 0.35% per week, indicating a modest cost for leverage. This rate can spike during times of high optimism, reflecting increased demand for leverage.
The basis rate, or futures premium, is another important metric. In a healthy market, the basis rate for Bitcoin futures ranges from 5% to 10% annually. The current 3-month futures premium is at 14%, above the neutral range but not excessively high. This suggests that there is still room for additional leverage without immediate risk of cascading liquidations.
Overall, while the increase in Bitcoin futures open interest raises concerns about potential liquidations in a market correction, the overall indicators suggest that the market is in a healthy state. The resilience of Bitcoin’s price, combined with a relatively low funding rate and a moderate futures premium, indicates a potentially bullish outlook in the near term.
Please note that this article is for general information purposes only and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.