- Bitcoin futures open interest recently reached an all-time high of $36 billion, indicating increased speculative trading activity which typically leads to higher volatility
- Bitcoin’s volatility has surged over the past month to over 80%, its highest level in over 15 months, compared to much lower volatility in stocks and commodities
- Large forced liquidations from leveraged futures positions, like the $375 million liquidated over two days recently, can exacerbate Bitcoin price swings as positions suddenly need to be settled
Bitcoin volatility could continue to create price whipsaws as futures open interest reaches new highs.
Bitcoin Futures Market Growth
The aggregate Bitcoin futures open interest reached a $36 billion all-time high on March 21, up from $30 billion two weeks prior. Moreover, the market leader, the Chicago Mercantile Exchange (CME), achieved a $119 billion open interest, surpassing the inflow of United States spot Bitcoin exchange-traded funds (ETFs) since their inception.
Increased Volatility After Spot ETF Launch
Despite the successful debut of spot ETFs, some analysts anticipated reduced volatility given that these instruments trade over $3 billion per day on average. However, recent data indicates the opposite as Bitcoin’s volatility has increased in the last four weeks.
Bitcoin’s 30-day volatility surged above 80%, marking its highest level in over 15 months. For comparison, the S&P 500 index volatility stands at 13% while WTI oil futures stand at 23%. Even stocks traditionally considered volatile in the traditional market such as Nvidia and Unity Software currently exhibit volatility of 72% and 59% respectively.
Leverage and Price Swings
Volatility examples in Bitcoin include a 10% correction on March 19, reaching a low of $60,795, followed by a 12% gain on March 20. This unforeseen price swing resulted in $375 million of forced liquidations in BTC futures contracts over two days. While this movement may not directly impact holders, it certainly influences the trajectory of the bull run and more significantly Bitcoin’s risk perception by the broader market.
The Bitcoin futures market, like any derivatives instrument, is a double-edged sword. It enables leveraged bullish and bearish bets. While entities aggressively shorting 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. Consequently, if Bitcoin’s price was suppressed by investors using leveraged shorts, one should anticipate the movement to eventually reverse, leading to short-term buying pressure. This partly explains why high futures open interest is linked to increased volatility.
Futures Premiums Remain Elevated
To determine whether Bitcoin futures contracts have been used to exert negative pressure on BTC’s price, one should analyze the monthly contracts premium. These are the preferred instruments of professional traders due to the absence of a funding rate.
The BTC futures premium has maintained levels above 16% for the past three weeks, which is typical of bullish markets. Furthermore, the indicator has not significantly declined even after Bitcoin’s price fell by 17.6% between March 14 and March 20.
If anything, the demand for leverage on Bitcoin’s futures appears to be more heavily concentrated on the buy side. Conversely, if the Bitcoin price continues to downtrend, those leveraged buyers might face forced liquidation, leading to drastic consequences given the $36 billion open interest.
Conclusion
The high and growing Bitcoin futures open interest reinforces the likelihood of continued volatility in the cryptocurrency’s price. While leveraged positions can temporarily move the market, they ultimately need to be settled, often fueling counter moves. Therefore, traders should brace for more whipsaws as speculative futures trading activity expands.
