Bitcoin (BTC) made a strong push towards $53,000 on February 20, briefly surpassing $52,900 before experiencing a correction due to $50 million in leveraged long liquidations. However, despite dropping to $50,750, Bitcoin futures open interest remains at $23.7 billion, which is only 2.5% below its all-time high in April 2021.
In April 2021, the open interest reached its peak at $24.3 billion but failed to break through the $64,900 resistance level, resulting in a 27% correction in just 11 days. With the current high demand for BTC futures contracts, investors are considering the possibility of a similar outcome.
Some traders argue that the increase in Bitcoin futures open interest indicates excessive borrowing, but this is not necessarily the case. Every derivatives trade requires a buyer and a seller of the same size, and an investor can be fully hedged even when using leverage. For example, they can buy monthly BTC futures and simultaneously sell an equivalent amount of perpetual contracts if there is a favorable price difference.
The profile of Bitcoin futures traders has changed over time. In 2021, Binance, driven by retail flow, dominated the BTC futures market share, while CME currently holds the dominance, primarily consisting of institutional investors. While this data does not completely eliminate the possibility of a sharp correction in the Bitcoin price driven by derivatives markets, it does reduce the likelihood.
One could argue that high open interest increases the potential for cascading liquidations, but for this to occur, there must be significant borrowing in the system. This scenario is less likely with CME contracts that require a 50% deposit margin. Additionally, Deribit traders tend to have a more conservative approach compared to Bybit, resulting in different levels of liquidation. Therefore, aggregating the entire BTC futures open interest as a single pool lacks logical coherence.
Regardless of the leverage used, one can gauge the optimism of professional traders by examining the Bitcoin futures premium. In normal markets, these contracts should trade 5% to 10% higher than regular spot markets to account for their extended settlement period.
Referred to as the basis rate, the Bitcoin fixed-month contracts premium recently peaked at 17% on February 20 as the price approached $53,000. Currently, the indicator stands at 14%, indicating that the drop to $50,750 did not dampen bullish sentiments. These figures are annualized, resulting in a 1.1% cost for carrying a leveraged long position for one month.
Interestingly, other metrics, such as perpetual contracts (inverse swaps), did not show the same bullish bias. These derivatives incorporate an embedded rate that is typically recalculated every eight hours. Data indicates that BTC funding rates have remained relatively flat for the past few days at 0.015% or 0.3% per week. In situations driven by excessive optimism, the rate can easily exceed 1.0% per week. Therefore, traders using perpetual contracts did not exhibit the same level of bullishness as those in the fixed-month markets.
Considering Bitcoin’s 4.2% price fluctuation on February 20 and the liquidation of only $50 million in long futures contracts, it can be inferred that overall bullish leverage remains healthy. Furthermore, the modest premium in BTC perpetual contracts rejects the notion of excessive leverage from retail traders. Therefore, there is no indication of an imminent sharp correction triggered by leveraged long liquidations.
It is important to note that this article does not provide investment advice or recommendations. All investment and trading decisions involve risk, and readers should conduct their own research before making any decisions.