Bitcoin investors are known for their anticipation of volatility, but they don’t always enjoy it when a price surge is followed by a sharp correction that triggers forced liquidations in futures contracts. These liquidations can amplify the downward movement of the price. Bitcoin futures play a crucial role in this scenario because traders can use leverage, which means that the larger the futures market becomes, the greater its impact on the price.
Recently, the aggregate open interest in Bitcoin futures reached an all-time high of $36 billion on March 21, up from $30 billion just two weeks earlier. The Chicago Mercantile Exchange (CME), the market leader, achieved an open interest of $11.9 billion, surpassing the inflow of U.S. spot Bitcoin exchange-traded funds (ETFs) since their inception.
Interestingly, the volatility of Bitcoin increased after the launch of spot ETFs in the U.S. Some analysts expected reduced volatility due to the high trading volume of these instruments, which averages over $3 billion per day. However, recent data shows that Bitcoin’s volatility has actually increased in the past four weeks.
Bitcoin’s 30-day volatility has surged above 80%, reaching its highest level in over 15 months. To put this in perspective, the S&P 500 index has a volatility of 13%, while WTI oil futures have a volatility of 23%. Even traditionally volatile stocks in the traditional market, such as Nvidia (NVDA) and Unity Software (U), currently have volatilities of 72% and 59% respectively.
Examples of this volatility in Bitcoin include a 10% correction on March 19, followed by a 12% gain on March 20. This unexpected price swing resulted in $375 million of forced liquidations in BTC futures contracts over two days. While this may not directly impact holders of Bitcoin, it certainly influences the trajectory of the bull run and the perception of risk in Bitcoin by the broader market.
The Bitcoin futures market, like any derivatives instrument, is a double-edged sword. It allows for leveraged bullish and bearish bets. While aggressive shorting of BTC futures may seem detrimental to the spot Bitcoin price, these trades must eventually be settled, either through buying back the contract or forced liquidation.
Therefore, if Bitcoin’s price is suppressed by investors using leveraged shorts, one can expect the movement to eventually reverse, leading to short-term buying pressure. This helps explain why high futures open interest is associated with increased volatility.
Some analysts attribute this added volatility to excessive leverage, while others simply label it as “manipulation.” For example, Amit Kukreja alleges that market makers have been pursuing leveraged longs and shorts. He points to stocks related to the sector, such as CleanSpark (CLSK), which gained 7% on the day Bitcoin’s price crashed to $68,000. However, it is impossible to determine the intentions of each market participant.
To determine if Bitcoin futures contracts are being used to exert negative pressure on the price of BTC, one should analyze the monthly contracts premium. Professional traders prefer these instruments due to the absence of a funding rate. Sellers typically demand a 5% to 10% premium relative to spot markets to compensate for the extended settlement period.
The BTC futures premium has remained above 16% for the past three weeks, which is typical of bullish markets. Furthermore, the premium has not significantly declined even after Bitcoin’s price fell by 17.6% between March 14 and March 20.
If anything, it appears that there is a greater demand for leverage on the buy side of Bitcoin’s futures. However, if the Bitcoin price continues to decline, leveraged buyers may face forced liquidation, which could have significant consequences given the $36 billion open interest in Bitcoin futures.
It’s important to note that this article does not provide investment advice or recommendations. Every investment and trading decision carries risks, and readers should conduct their own research before making any decisions.