13 Billion Dollar Open Interest in Bitcoin Futures Reflects Professional Traders‘ Great Optimism

Bitcoin’s price quickly recovered to $40,000, but key derivative indicators show that traders are happily flirting with overbought levels.

The Bitcoin price (BTC) recovered by 27% only three days after testing the 31,000 USD support and today the bulls recovered the 40,000 USD level.

This rapid recovery occurred despite the fact that the digital asset experienced one of the largest buy-side liquidations in a single day, when USD 1.5 billion was swept off the books. Interestingly, futures traders seem to have returned with an even greater appetite.

Zcash (ZEC), Kusama (KSM) and Hedget (HGET) all skyrocketed when Bitcoin reached $40,000

After such a large settlement event, an increased appetite by futures traders is unexpected, but professional investors are able to cover their positions and execute complicated strategies involving options.

To evaluate the impact of recent settlements and better understand how these futures traders have positioned themselves, we must begin by analyzing open interest. Large reductions in this indicator could show that traders were taken by surprise and are currently unwilling to add positions.
Aggregate open interest from Bitcoin futures.

As indicated by the above data, BTC’s open interest in futures reached a historic high of USD 13 billion on January 14, a 74% increase over last month.

For those not familiar with futures contracts, buyers and sellers are matched at all times. Each contract on a long position is betting that the price will continue to rise and has been negotiated with one or more entities willing to sell it short.

Futures markets survived the test of collapse

Bitcoin’s rapid recovery from its recent low is a sign that traders are willing to take risks and therefore are not affected by such large price changes, or that most of this activity is made up of hedging and arbitrage trading.

3 Bitcoin price indicators show that professional traders are still bullish

Hedging strategies are used to provide protection to traders. For example, selling futures contracts while maintaining a larger BTC position in a cold wallet. Meanwhile, arbitrage strategies also involve little or no directional exposure, meaning that price movements do not affect trading performance. Anyone could sell longer-term BTC futures contracts while buying the perpetual, with the goal of benefiting from potential price distortions.

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

CME’s Bitcoin futures provided over 11 million BTCs in volume last year

These indicators tend to show large swings during unexpected price movements if leverage has been behind the move. On the other hand, these metrics will remain relatively stable if traders do not have directional exposure because they are mainly implementing hedging and arbitrage strategies.

The funding rate for perpetual futures barely moved

Perpetual contracts, also known as reverse swaps, have a built-in rate, which is generally charged every eight hours. When buyers (those in long positions) are the most highly leveraged, the financing rate will show a positive value. Therefore, the buyers will be the ones who pay the commissions. This problem is especially true during bull runs, when there is generally more demand for long positions.

Funding rate of BTC perpetual futures Source: NYDIG Digital Assets Data

As we can see in the graph above, the financing rate has fluctuated between 0% and 2% since January 5, a sign that no anomaly has occurred. If there had been moments of panic among traders of perpetual contracts, the rate would have moved to the negative side, as those betting downwards (traders in short positions) would be paying the commissions.