In the past week, Bitcoin (BTC) experienced a significant surge, reaching a 20-month high at $41,130. The speculation surrounding this rally intensified following the $100 million liquidation of bearish Bitcoin futures within a 24-hour period. However, a closer look at BTC derivatives data reveals a different perspective, emphasizing the importance of spot market activity. While the Chicago Mercantile Exchange (CME) offers USD-settled contracts for Bitcoin futures, where no physical Bitcoin changes hands, these futures markets play a pivotal role in influencing spot prices. The massive scale of Bitcoin futures, with an aggregate open interest of $20 billion, clearly demonstrates the keen interest of professional investors. In contrast, the $200 million worth of BTC futures shorts liquidated in the same period represents a mere 1% of the total outstanding contracts. This figure is significantly dwarfed by the substantial $190 billion trading volume during that timeframe. Even when focusing solely on the CME, which has been known to inflate trading volume, its daily volume of $2.67 billion should have easily absorbed a $100 million 24-hour liquidation. This has led investors to question whether the recent Bitcoin rally can be attributed to the manipulation of a few whales within the futures markets.
Attempting to gauge the extent of liquidations at different price levels through tape reading techniques may not provide a comprehensive understanding. Such an approach fails to consider whether whales and market makers are adequately hedged or have the ability to deposit additional margin. Despite Bitcoin’s surge to a 20-month high, futures and options markets appear relatively subdued. There are three pieces of evidence to suggest that there is no immediate threat of a cascade of short contract liquidations if Bitcoin surpasses the $43,500 threshold.
Perpetual contracts, also known as inverse swaps, include an embedded rate that is recalculated every eight hours. A positive funding rate indicates an increased demand for leverage among long positions, while a negative rate signifies the need for additional leverage among short positions. Although a peak funding rate of 0.04% per eight hours was observed on December 4, this level, equivalent to 0.9% per week, proved to be short-lived. The current 0.4% weekly rate exerts minimal pressure on leverage-seeking longs, indicating a lack of urgency among retail traders. Conversely, there is no evidence of exhaustion among bearish traders.
To determine whether Bitcoin perpetual swaps represent an anomaly, attention turns to BTC monthly futures contracts that are favored by professional traders due to their fixed funding rate. Typically, these contracts trade at a premium of 5% to 10% to account for their extended settlement period. Data on BTC fixed-term futures contracts reveals a peak premium of 12% on December 4, which currently rests at 11%. This level remains reasonable, especially considering the prevailing bullish momentum. Previous rallies in 2021 saw premiums surge beyond 30%, further challenging the notion that the rally primarily stems from Bitcoin derivatives.
Further Considerations for the Recent Surge
Despite Bitcoin’s price surging by 14.5% in just seven days and only $200 million worth of short futures contracts being liquidated, questions arise regarding the conservative leverage employed by bears or the diligent increase in margin deposits to protect their positions. When taking into account the funding rate and futures basis rate, there is no clear indication that surpassing the $43,000 mark would trigger significant stock losses. Essentially, the recent surge finds support in spot market accumulation and a reduction in the available supply of coins on exchanges. Exchanges recorded a net outflow of 8,275 BTC over the past week, according to Coinglass.
While there has been a substantial surge in Bitcoin’s price, the dynamics of the futures market and the actions of traders seem to point towards a rally supported by spot market accumulation rather than excessive activity in derivatives. Evaluating factors such as funding rates, futures basis rates, and the limited liquidations in the face of a significant rally provides insights into the underlying market dynamics. The interplay between the futures and spot markets continues to shape the trajectory of Bitcoin and its overall market sentiment.
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