Bitcoin (BTC) futures trading has been at a high level since July 21, with the Chicago Mercantile Exchange and Bakkt seeing significant increases in volume and open interest in their contracts. This resurgence of BTC futures comes as the spot market value of the largest crypto by market cap hit a new high in 2020.
Two months after the May 2020 halving event, BTC started showing signs of the expected bullish advance. Bitcoin typically sets a new all-time high within a year of a drop in the overall reward subsidy, with BTC optimists saying the trend will continue.
Amid the current positive price action for Bitcoin, bullish sentiment appears to be gaining momentum in the BTC futures market. Long positions currently outnumber shorts by almost 9 to 1, meaning any significant downward retracement could lead to a cascade of sell-offs on bullish bets, especially for traders with over-leveraged long positions. In mid-March 2020, market panic caused by the COVID-19 pandemic caused Bitcoin to drop to $ 3,800. This drop caused a cascade of forced liquidations, especially on derivatives exchanges like BitMEX.
Bitcoin price hits new high in 2020
The BTC price spike comes amid a slew of positive news for the crypto space with the U.S. Office of the Comptroller of the Currency allowing national banks to offer cryptocurrency custody services. Major economies have also moved towards stimulus packages to ease the disruption caused by the ongoing coronavirus pandemic. EU leaders have already approved a $ 2 trillion spending plan, with almost half of the amount earmarked for supporting economies hardest hit by COVID-19. In the United States, lawmakers have been working on another round of stimulus payments, which could reach $ 3 trillion.
With the US Federal Reserve printing more money in a month than in the last 200 years, investors seem to want to hedge against the risk of a currency downgrade. This sentiment appears to provide significant favorable winds for safe-haven assets like BTC and gold. Bitcoin’s rise to a new high in 2020 also coincided with the setting of a new record price per ounce for gold. Indeed, the precious metal is about to cross the $ 2,000 mark, with silver also at its highest level in over seven years.
CME BTC Futures Interest Sets New Record
As previously reported by Cointelegraph, open interest in Bitcoin futures has increased alongside gains seen in the spot market. According to data from crypto derivatives analysis platform Skew, open interest in CME BTC futures is at an all-time high of $ 740 million.
A week after ‘Black Thursday’, open interest in CME Bitcoin futures almost fell to its lowest level in three months. However, as the spot price rallied in the weeks that followed, open interest in CME’s cash settled BTC futures contract also rose to halving in May. With the overall reward subsidy event not triggering any immediate prize wins, OI again plunged significantly. At the time, retail crypto derivatives traders suffered liquidations of around $ 1.3 billion as the price of BTC saw a return of $ 10,000 to the support level of $ 8,600.
It is perhaps interesting to note that while the OI is on the rise, the trading volume has cooled considerably in the last days of July. The same trend can be seen for Bakkt, with open interest at an all-time high of $ 22 million, but trading volume has declined for both its cash and physically settled futures.
Indeed, the rise in OI in Bitcoin futures contracts is representative of the observed trend in the crypto derivatives arena as a whole. According to its Q2 2020 report, market analysis platform TokenInsight found that large-scale cryptocurrency derivatives OI rose from $ 2.62 billion to $ 5.53 billion in the year. second quarter of 2020. As a general rule, high OI and low volume point to more exposure oriented activity than actual trading. Often times, this scenario indicates that traders are looking to sell the price of Bitcoin.
However, according to data from the chain analysis platform Datamish.com, the ratio of long / short percentages is almost at its highest level in 2020. This trend suggests that traders expect Bitcoin to have still room for more hike. Joe DiPasquale, CEO of crypto hedge fund BitBull Capital, told Cointelegraph that the high OI indicates that traders expect an imminent rise in volatility:
“Right now, Bitcoin is at a critical level. If it stays above $ 11,000 for a week or so, we can expect further appreciation. However, it will only be around $ 15,000 that we can expect real retail FOMO and the possibility of a parabolic lead. “
For Adam Todd, CEO of crypto derivatives exchange Digitex Futures, the rise in the OI means more money is flowing in the Bitcoin futures market. In a conversation with Cointelegraph, Todd said, “In general, a rise in open interest means that the price will also rise as new money comes into the market.” Growing open interest in falling volume also indicates that traders are choosing to adopt longer holding periods. With Bitcoin’s price volatility falling to historically low levels prior to this current surge, short-term funds would have become unprofitable.
Crypto Derivatives Trade in Numbers: First Half of 2020
The rise in OI for CME and Bakkt is one of the many indications of increasing institutional activity in Bitcoin and crypto in general. Grayscale, the largest cryptocurrency hedge fund, recently saw its total assets under management surpass the $ 5 billion mark.
Indeed, Grayscale’s AUM has grown by around $ 500 million in just one week to add to the surge of over $ 1.4 billion recorded in the first half of 2020. While the Grayscale Bitcoin Trust is still the hugely dominant product in the company’s catalog, Litecoin (LTC) shares have risen over the past month, indicating some institutional appetite for the seventh largest crypto by market cap. Litecoin’s skyrocketing shareholding coincided with LTC tracking Bitcoin’s price gains even as other altcoins turned red. Commenting on the prospects for greater institutional involvement in Bitcoin, Todd noted:
“I think Bitcoin’s recent breakthrough, especially at a time when traditional markets are so uncertain, will certainly inspire more institutional investors to take a second, third or even fourth look at adding BTC to their portfolios. However, institutions will likely wait for a price correction, unlike retail investors, they will not follow a rally. “
Bitcoin OI options also on the rise
Besides futures, the OI for Bitcoin options also saw a similar increase. Of the $ 2.2 billion total open interest for BTC options, Deribit is $ 1.79 billion, which equates to an 80% dominance of the market. Again, as is the case in the futures arena, the rise in OI for BTC options occurs alongside a fall in trading volume. In addition to dominating the OI of Bitcoin options, Deribit also controls over 90% of the market’s transaction volume, up from the 60% dominance achieved in Q2 2020.
Data from Skew shows that the Bitcoin options put / call ratio, or PCR, is starting to rise steadily. A rising PCR usually indicates bullish sentiments, and at 0.63 traders seem to expect more upside for BTC. However, when the PCR begins to approach the 1.0 mark, a contrarian interpretation usually forms for the indicator, as high PCR values usually precede the emergence of bearish sentiments as seen in May before the event of halving. Ahead of the 2020 halving, the Bitcoin options PCR rose to 0.81, its highest level in 2020. A few days later, BTC saw a $ 10,000 return to the $ 8,600 price level.
A similar situation occurred the last time the PCR of BTC options nearly hit 1.0, which was at the end of June 2019. Bitcoin fell lower for the second half of 2019, ending the year at $ 7,300. If the trend continues, then the current upward price action could be interrupted by a significant pullback. According to DiPasquale, such a retracement is to be expected:
“Almost all rapid surges are followed by pullbacks, which are healthy for market action as profit taking allows investors / traders to take breaks, and new capital can enter the market when the floors are set. For now, the area between $ 10,000 and $ 10,500 presents a solid support area for any pullback. “
The 106,000 BTC (~ $ 1.2 billion) of Bitcoin futures and options that expired on July 31 could also impact the price movement in the third quarter of 2020. For Bitcoin options, more than $ 1.4 billion of global open interest is still available for trading in August and September.
With Bitcoin breaking its sideways accumulation, crypto derivatives trading could see a resurgence in the third quarter of 2020. According to the TokenInsight report, cryptocurrency derivatives trading topped $ 2 trillion for the second quarter in a row, which translates to by “a year-over-year increase of 165.56% compared to the second quarter of 2019.”
With $ 2.159 trillion in volume, crypto derivatives accounted for around 27.4% of the total cryptocurrency trading market, as reported by TokenInsight. Despite the lull in price action for about half of the period, the crypto derivatives niche still saw a marginal increase as spot volume fell 18%.