$13B Bitcoin’s open interest futures represents the buzzing excitement of traders

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Bitcoin’s price immediately returned to $40,000, but main derivatives metrics suggest traders are happily flirting with over-purchased prices.

Bitcoin (BTC) price recovered by 27 percent just three days after checking the $31,000 support and earlier today the bull recovered the $40,000 mark.

This swift turnaround happened amid a digital commodity facing one of the biggest buy-side liquidations in a single day, with $1.5 billion wiped off the books. Interestingly, futures contract traders seem to have returned with a much greater appetite.


After such a massive liquidation case, the increased interest of futures traders is somewhat surprising, but experienced investors are expert at keeping their positions and applying complex strategies involving options.

In order to quantify the effect of recent liquidations and to better understand how these futures traders have been placed, an open interest review should begin. Significant declines in this measure could suggest that traders have been taken by surprise and are currently reluctant to add positions.


BTC futures aggregate open interest. Source: Bybt.com

As the above data indicates, BTC futures open interest reached a $13 billion all-time-high on Jan. 14, a 74% increase from the previous month.

For those unfamiliar with futures contracts, buyers and sellers are matched at all times. Every long contract is betting on further upside and has been traded against one or more entities willing to short it.

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The futures markets survived the crash test

Bitcoin’s swift recovery from its recent low signals that either traders are risk-takers and hence unaffected by those large price swings, or that most of this activity is composed of hedge and arbitrage trades.

Hedge strategies are used to provide traders with protection. For example, selling futures contracts while simultaneously holding a larger BTC position in a cold wallet. Meanwhile, arbitrage strategies also involve little to no directional exposure, meaning price swings do not impact the trading performance. One could sell longer-term BTC futures contracts while buying the perpetual one, aiming to benefit from eventual price distortions.

The best way to analyze whether directional trades and leverage bets have been dominating the scene is to look at the futures premium and the perpetual futures funding rate.

These indicators tend to oscillate massively during unexpected price swings if leverage trades have been behind the move. On the other hand, those metrics will remain relatively steady if traders have no directional exposure because they are primarily deploying hedge and arbitrage strategies.

The perpetual futures’ funding rate hardly moved

Perpetual contracts, also known as inverse swaps, have an embedded rate, usually charged every eight hours. When buyers (longs) are the ones demanding more leverage, the funding rate turns positive. Therefore, the buyers will be the ones paying up the fees. This issue holds especially true during bull runs, when there is usually more demand for longs.

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BTC perpetual futures funding rates. Source: NYDIG Digital Assets Data

As shown above, the funding rate has been ranging from 0% to 2% since Jan. 5, thus indicating that no anomaly took place. Had there been moments of panic among perpetual contract traders, the rate would have shifted to the negative side, as those betting on the downside (shorts) would be paying the fee.

The average 1% weekly funding rate seems exceptionally modest considering Bitcoin’s 74% rally over the past three weeks.

The 3-month BTC futures premium is still high

Professional traders tend to dominate longer-term futures contracts with set expiry dates. Thus, by measuring how much more expensive futures are versus the regular spot market, a trader can gauge how bullish they are.

The 3-month fixed-calendar futures should usually trade with a 2% or higher premium versus regular spot exchanges. This equals an 8% annualized yield, which can also be interpreted as a lending rate, as the seller is postponing settlement.

Whenever this indicator fades or turns negative, this is an alarming red flag. Such a situation, also known as backwardation, indicates that the market is turning bearish.

BTC 3-month futures premium vs. spot markets. Source: NYDIG Digital Assets Data

The above chart shows that the indicator has been holding a 4% minimum. Meanwhile, a 5% rate translates to 21% annualized, which is higher than most decentralized finance applications are returning for stablecoin deposits.

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Therefore, the indicator has been flirting with overbought levels, indicating optimism from professional traders. This data is a positive reading, as the recent unexpected swings have not reduced their appetite.

At the moment, it’s clear that the recent volatility has not shaken out derivatives traders. Meanwhile, the growing futures open interest and the 3-month premium indicate that there are no sizable bets on a downturn or lack of confidence in the market.


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