Bitcoin (BTC) investors are renowned for their love of volatility, but they often find themselves disappointed when a price surge is followed by a sharp correction that triggers forced liquidations in futures contracts, exacerbating the downward movement. Bitcoin futures play a crucial role in the market as they allow traders to use leverage, meaning that the larger this market becomes, the greater its impact on prices.
The aggregate open interest in Bitcoin futures reached an all-time high of $36 billion on March 21, up from $30 billion just two weeks earlier. The Chicago Mercantile Exchange (CME), the market leader, achieved an open interest of $11.9 billion, surpassing the inflow of US spot Bitcoin exchange-traded funds (ETFs) since their inception.
Interestingly, Bitcoin’s volatility has increased in the four weeks following the launch of spot ETFs in the US, despite expectations of reduced volatility due to the significant trading volume of these instruments. Recent data shows that Bitcoin’s 30-day volatility has surged above 80%, its highest level in over 15 months. In comparison, the volatility of the S&P 500 index is 13%, while WTI oil futures stand at 23%. Even traditionally volatile stocks in the traditional market, such as Nvidia (NVDA) and Unity Software (U), currently exhibit volatilities of 72% and 59% respectively.
Bitcoin has experienced notable price swings, with a 10% correction on March 19 followed by a 12% gain on March 20. This unexpected price movement led to $375 million of forced liquidations in BTC futures contracts over two days. While this may not directly impact holders, it certainly affects the trajectory of the bull run and the broader market’s perception of Bitcoin’s risk.
The Bitcoin futures market, like any derivative instrument, is a double-edged sword: it allows for both leveraged bullish and bearish bets. While aggressive shorting of BTC futures may seem detrimental to the spot Bitcoin price, the derivatives trade must eventually be settled, either through buying back the contract or forced liquidation. Therefore, if Bitcoin’s price is suppressed by leveraged shorts, one can expect the movement to eventually reverse, leading to short-term buying pressure. This partly explains why high futures open interest is associated with increased volatility.
Some analysts attribute the increased volatility to excessive leverage, while others suggest it may be due to ‘manipulation’. For example, Amit Kukreja alleges that market makers have been pursuing leveraged longs and shorts, and stocks related to the sector, such as CleanSpark (CLSK), gained 7% on the day Bitcoin’s price crashed to $68,000. However, it is impossible to determine the intentions of each market participant.
To assess whether Bitcoin futures contracts have been used to exert negative pressure on the price of BTC, one should analyze the premium on monthly contracts. These contracts are favored by professional traders due to the absence of a funding rate. To compensate for the longer settlement period, sellers typically demand a premium of 5% to 10% relative to spot markets. The BTC futures premium has remained above 16% for the past three weeks, indicating a bullish market. Furthermore, the premium has not significantly declined even after Bitcoin’s price fell by 17.6% between March 14 and March 20.
If anything, the demand for leverage on Bitcoin futures seems to be concentrated more heavily on the buy side. However, if the Bitcoin price continues to decline, leveraged buyers may face forced liquidation, leading to significant consequences given the $36 billion open interest.
It is important to note that this article does not provide investment advice or recommendations. Every investment and trading decision carries risks, and readers should conduct their own research before making any decisions.