Bitcoin (BTC) investors eagerly anticipate volatility, but they often find themselves disappointed when a surge in price is followed by a sharp correction that triggers forced liquidations in futures contracts and intensifies the downward movement. Bitcoin futures play a crucial role in this dynamic as traders can use leverage, meaning that as the futures market grows, its impact on the price of Bitcoin also amplifies.
The aggregate open interest of Bitcoin futures reached an all-time high of $36 billion on March 21, up from $30 billion just two weeks earlier. Notably, the Chicago Mercantile Exchange (CME) took the lead with an $11.9 billion open interest, surpassing the inflow of U.S. spot Bitcoin exchange-traded funds (ETFs) since their inception.
Contrary to expectations, the launch of spot ETFs did not lead to reduced volatility in Bitcoin. Despite these instruments trading an average of over $3 billion per day, recent data shows that Bitcoin’s volatility has actually increased over the past four weeks. In fact, Bitcoin’s 30-day volatility surged to over 80%, reaching its highest level in over 15 months. By comparison, the S&P 500 index has a volatility of 13%, while WTI oil futures stand at 23%. Even traditionally volatile stocks like Nvidia (NVDA) and Unity Software (U) currently exhibit volatilities of 72% and 59%, respectively.
Examples of Bitcoin’s volatility include a 10% correction on March 19, with the price hitting a low of $60,795, 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 movement may not directly impact holders of Bitcoin, it certainly influences the trajectory of the bull run and, more significantly, affects the broader market’s perception of Bitcoin’s risk.
The Bitcoin futures market, like any derivatives instrument, is a double-edged sword. It allows for leveraged bets on both bullish and bearish positions. While aggressive shorting of BTC futures may seem detrimental to the spot Bitcoin price, ultimately, the derivatives trade must 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 anticipate a reversal in the movement, leading to short-term buying pressure. This partly explains why high futures open interest is associated with increased volatility.
Some analysts attribute the added volatility to excessive leverage, while others suggest that it is a result of manipulation. For example, Amit Kukreja alleges that market makers have been engaging in leveraged longs and shorts. He points out that stocks directly related to the sector, such as CleanSpark (CLSK), 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 whether Bitcoin futures contracts have been used to exert negative pressure on BTC’s price, one should analyze the premium of monthly contracts. These contracts are favored by professional traders due to the lack of a funding rate. In order to compensate for the extended settlement period, sellers typically demand a 5% to 10% premium relative to spot markets. The BTC futures premium has remained above 16% for the past three weeks, which is typical of a bullish market. Furthermore, the premium has not significantly declined even after Bitcoin’s price dropped by 17.6% between March 14 and March 20.
If anything, it appears that the demand for leverage on Bitcoin futures is heavily concentrated on the buy side. However, if the price of Bitcoin continues to decline, leveraged buyers may face forced liquidation, which could have drastic consequences given the $36 billion open interest in the market.
It is 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.