Bitcoin (BTC) made a 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 still stands at $23.7 billion, just 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 the resistance at $64,900, resulting in a 27% correction in just 11 days. With the current strong 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 true. Every derivatives trade requires a buyer and 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 evolved over time. In 2021, Binance, driven by retail flow, dominated the BTC futures market share, while the current dominance is held by CME, primarily composed of institutional investors. While this data does not eliminate the possibility of a sharp correction driven by derivatives markets, it does reduce the likelihood.
High open interest can potentially lead to cascading liquidations, but significant borrowing in the system is required for such conditions to occur. This is less likely with CME contracts, which require a 50% deposit margin. Additionally, Deribit traders tend to adopt a more conservative approach compared to Bybit, resulting in different liquidation levels. Therefore, aggregating the entire BTC futures open interest as a single pool lacks logical coherence.
Regardless of the leverage used, the optimism of professional traders can be assessed 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. The Bitcoin fixed-month contracts premium recently peaked at 17% on February 20, indicating bullish sentiments. Currently, the indicator stands at 14%, suggesting that the drop to $50,750 did not dampen optimism.
Interestingly, 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 shows that BTC funding rates have remained flat at 0.015% for the past couple of days, equivalent to 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 bullishness as those in fixed-month markets.
Considering Bitcoin’s 4.2% price oscillation on February 20 and the liquidation of only $50 million in long futures contracts, it can be inferred that overall bullish leverage remains healthy. Moreover, the modest premium in BTC perpetual contracts rejects the hypothesis of excessive leverage from retail traders. As a result, there is no indication of an imminent sharp correction triggered by leveraged long liquidations.
Please note that this article does not provide investment advice or recommendations. Readers should conduct their own research before making any investment or trading decisions.