Bitcoin (BTC) has achieved a historic milestone by surpassing $72,000 for the first time ever on March 11. This represents a 9.5% increase over the past week. However, the volatility of the rally has left Bitcoin bulls cautious about celebrating this new all-time high, especially due to the surge in demand for leveraged BTC futures contracts.
Analysts have highlighted the risk posed by the $35.8 billion in Bitcoin futures open interest. Traders often rely too heavily on leveraged positions, leading to increased volatility rather than a clear directional bias. It’s important to note that the Chicago Mercantile Exchange (CME) currently holds the largest share in Bitcoin futures, surpassing traditional crypto exchanges like Binance, Bybit, and OKX.
Despite the impressive figures, it’s worth mentioning that the Bitcoin open interest in futures remains 27% below its peak in October 2022 when expressed in BTC. However, the current 495,380 BTC in futures open interest is still significant enough to cause sharp volatility spikes as the price of Bitcoin fluctuates. This was evident on March 4 when $325 million in leveraged BTC long and short positions were liquidated.
To assess whether leverage demand is mainly towards buying, it’s necessary to examine Bitcoin’s futures monthly contracts. These contracts usually trade at a slight premium over the spot markets. Recent data indicates a surge in demand for leveraged BTC long positions, with the premium reaching 23%, the highest in over 18 months. However, considering Bitcoin’s recent 40% price surge, it’s too early to view the current futures premium as unsustainable, especially since past bull markets have seen premiums exceed 45%.
Retail traders buying Bitcoin above $72,000 could potentially contribute to additional volatility. The funding rate for Bitcoin futures perpetual contracts reached 2.1% per week on March 11, the highest in over 18 months. Retail traders often prefer these contracts due to their close tracking of spot market prices, but the variable leverage fee, known as the funding rate, adds an element of risk. A positive rate suggests that traders are heavily relying on leverage for their long positions.
While Bitcoin bulls benefit from strong inflows into spot exchange-traded funds (ETFs) and consistent Bitcoin purchases by Microstrategy, retail traders entering the market at these high prices could prompt market makers and arbitrage desks to exploit over-leveraged positions and generate volatility. Although a few big players cannot sustainably push Bitcoin’s price down in the long run, the risk of liquidations increases if there is a price dip and investors are paying a 2.1% fee every week to maintain bullish bets.
It’s important to note that this article does not provide investment advice or recommendations. Readers should conduct their own research and consider the risks involved before making any investment or trading decisions.