Bitcoin (BTC) made a strong 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, the open interest in Bitcoin futures remains at $23.7 billion, which is 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 through the resistance level of $64,900, resulting in a 27% correction within 11 days. With the current high 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 universally true. Every derivatives trade requires a buyer and a seller of equal 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 changed over time. In 2021, Binance led in BTC futures market share, driven by retail flow, while the current dominance is held by CME, which mainly consists of institutional investors. Although this data does not eliminate the possibility of a sharp correction in Bitcoin’s price driven by derivatives markets, it does reduce the likelihood.
One could argue that high open interest increases the potential for cascading liquidations, but this requires significant borrowing in the system, which is less likely with CME contracts that require a 50% deposit margin. Additionally, Deribit traders tend to adopt a more conservative approach compared to Bybit, resulting in different liquidation levels. Therefore, considering the entire BTC futures open interest as a single pool is not logically coherent.
Regardless of the leverage used, one can assess the optimism of professional traders by looking at 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 as the price approached $53,000. Currently, the indicator stands at 14%, indicating that the drop to $50,750 did not dampen bullish sentiments. These figures are annualized, resulting in a 1.1% cost for carrying a leveraged long position for one month.
Interestingly, perpetual contracts (inverse swaps) did not show the same bullish bias. These derivatives have an embedded rate that is typically recalculated every eight hours and indicate excessive demand for leveraged long positions. However, data shows that BTC funding rates have remained relatively flat for the past few days at 0.015% or 0.3% per week. In situations driven by excessive optimism, this rate can easily exceed 1.0% per week. Therefore, traders using perpetual contracts did not exhibit the same bullishness observed in the 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. Furthermore, the modest premium in BTC perpetual contracts rejects the hypothesis of excessive leverage from retail traders. Therefore, there is no indication of an imminent sharp correction triggered by leveraged long liquidations.
Disclaimer: This article does not provide investment advice or recommendations. Every investment and trading move carries risks, and readers should conduct their own research before making any decisions.