Bitcoin (BTC) reached a historic milestone on March 11 as it surged past $72,000 for the first time ever, marking a 9.5% increase over the past week. However, investors are cautious about celebrating this new all-time high due to the surge in leverage demand through BTC futures contracts.
Analysts have pointed out that the $35.8 billion in Bitcoin futures open interest poses a risk, as traders tend to rely too heavily on leveraged positions. While this data confirms investors’ interest, it does not necessarily indicate a bullish market as futures longs and shorts are always matched, creating volatility instead of a clear direction.
It is worth noting that the Chicago Mercantile Exchange (CME) currently holds the largest share in Bitcoin futures, surpassing traditional crypto exchanges. In November 2021, when Bitcoin futures open interest last peaked, BTC experienced a 31.5% decline in just 30 days.
While the current Bitcoin open interest in futures is 27% below its October 2022 peak when expressed in BTC, the current 495,380 BTC in open interest is still significant enough to cause sharp volatility spikes as Bitcoin’s price fluctuates. This was evident on March 4 when $325 million in leveraged BTC positions were liquidated.
To assess whether leverage demand is predominantly towards buying, it is necessary to examine Bitcoin’s futures monthly contracts. These contracts typically trade at a slight premium over the spot markets. Recent data indicates a surge in demand for leveraged BTC long positions, with the premium recently peaking at 23%, the highest in over 18 months. However, considering Bitcoin’s recent price surge and past bull markets, it is too early to consider the current futures premium as unsustainable.
Retail traders buying Bitcoin above $72,000 could introduce additional volatility into the market. The funding rate for Bitcoin futures perpetual contracts reached 2.1% per week on March 11, the highest in over 18 months. This suggests that traders are relying heavily on leverage for their long positions.
Bitcoin bulls have the advantage of strong inflows into spot exchange-traded funds (ETFs), and Microstrategy continues to buy more Bitcoin despite the soaring prices. However, if retail traders join in and pour into these expensive perpetual contracts at $72,000, market makers and arbitrage desks may capitalize on over-leveraged positions and stir up volatility.
While a few large players cannot sustainably push Bitcoin’s price down, the risk of a domino effect of liquidations due to high leverage fees remains if there is a price dip. Nonetheless, with steady ETF inflows, it seems premature to predict a major price drop based solely on the leverage scenario.
This article does not provide investment advice or recommendations. Readers should conduct their own research before making any investment or trading decisions.