Bitcoin (BTC) has achieved a new milestone, surpassing $72,000 on March 11. This represents a 9.5% increase in the past week. However, the surge in leverage demand through BTC futures contracts has made Bitcoin bulls cautious about celebrating this all-time high.
Analysts have highlighted the potential risk posed by the $35.8 billion in Bitcoin futures open interest. Traders often rely heavily on leveraged positions, which can create volatility rather than a clear market direction. It’s important to note that the Chicago Mercantile Exchange (CME) currently dominates the Bitcoin futures market, surpassing popular crypto exchanges such as Binance, Bybit, and OKX.
Despite the increase in open interest, the figure 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 Bitcoin’s price fluctuates. For example, on March 4, $325 million worth of leveraged BTC long and short positions were liquidated.
To assess whether leverage demand is predominantly for buying, it’s necessary to examine Bitcoin’s futures monthly contracts. These contracts typically trade at a slight premium over the spot markets, known as contango. Recent data indicates a surge in demand for leveraged BTC long positions, with the premium reaching its highest level in over 18 months. However, given Bitcoin’s recent 40% price surge, it’s too early to determine if the current futures premium is unsustainable, as past bull markets have seen premiums exceed 45%.
Retail traders buying Bitcoin above $72,000 could introduce additional volatility into the market. The funding rate for Bitcoin futures perpetual contracts reached its highest level in over 18 months on March 11. A positive funding rate suggests that traders are heavily relying on leverage for their long positions. If retail traders continue to pour into expensive perpetual contracts, market makers and arbitrage desks may take advantage of over-leveraged positions, potentially causing volatility.
While a few large players may not have a long-term impact on Bitcoin’s price, the risk of a domino effect of liquidations exists if there is a price dip. However, with steady inflows into spot exchange-traded funds (ETFs) and continued Bitcoin purchases by Microstrategy, it may be premature to predict a major price drop based solely on the leverage scenario.
It’s important to note that this article does not provide investment advice or recommendations. Readers should conduct their own research and make informed decisions when it comes to investments and trading.