Bitcoin futures open interest hits all-time high — Is it a red flag for BTC price?

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12 Mar 2024

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MARCEL PECHMAN
14 HOURS AGO

Bitcoin futures open interest hits all-time high — Is it a red flag for BTC price?

Traders’ strong appetite for leverage could be creating the perfect scenario for cascading liquidations.
9843
14

4:34
MARKET ANALYSIS
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Bitcoin
BTC
$72,098
soared above $72,000 for the first time ever on March 11, marking a 9.5% increase over the past week. The rally has seen significant volatility, highlighted by a 4.8% intraday rise to $70,055 on March 8, followed by a 5.9% dip to $65,935.As a result, Bitcoin bulls are wary of celebrating this new all-time high, particularly due to the surge in leverage demand through BTC futures contracts.

Demand for Bitcoin futures soar, but that’s not necessarily bullish

Analysts have pointed out that the $35.8 billion in Bitcoin futures open interest poses a risk, as traders often over-rely on leveraged positions.
Bitcoin futures aggregate open interest, USD. Source: Coinglass
This data confirms investors' interest, but it cannot be deemed inherently bullish because futures longs (buyers) and sellers (shorts) are matched at all times. This situation creates volatility rather than directional bias.
It is also worth mentioning that the Chicago Mercantile Exchange (CME) presently holds the largest share in Bitcoin futures, surpassing traditional crypto exchanges such as Binance, Bybit, and OKX. However, this was not the case in November 2021 when Bitcoin futures open interest last peaked as BTC traded near $69,000, subsequently experiencing a 31.5% decline in just 30 days.
When this figure is expressed in BTC, the Bitcoin open interest remains 27% below its October 2022 peak. Yet, the current 495,380 BTC in futures open interest is substantial enough to trigger sharp volatility spikes as Bitcoin’s price fluctuates. This was evident on March 4, when a staggering $325 million in leveraged BTC long and short positions were liquidated.
Assessing whether leverage demand is predominantly toward buying requires an examination of Bitcoin's futures monthly contracts. These contracts usually trade at a slight premium over the spot markets, as sellers ask for more money to postpone settlement. Typically, BTC futures should trade at an annualized premium of 5 to 10% — a condition known as contango, which is common across financial markets.
BTC 3-month futures annualized premium. Source: Laevitas.ch
Recent data indicates a surge in demand for leveraged BTC long positions, with the premium breaking the 10% neutral mark four weeks ago. The premium recently peaked at 23%, the highest in over 18 months, with the current 21% level often reflecting excessive optimism. However, considering Bitcoin’s 40% price surge in the last two weeks, it's too soon to consider the current futures premium as unsustainable, especially when past bull markets have seen premiums exceed 45%.

Retail trades buying above $72,000 could entice additional volatility

On March 11, the funding rate for Bitcoin futures perpetual contracts reached 2.1% per week, marking a peak unseen in over 18 months. Retail traders often prefer these contracts for their close tracking of the spot market prices, yet they come with a twist: a variable leverage fee, known as the funding rate. In essence, a positive rate suggests that traders are leaning more heavily on leverage for their long positions.
Related: Bitcoin breaches $71K for the first time
Bitcoin perpetual futures 8-hour funding rate. Source: Laevitas.ch
Bitcoin bulls have the advantage of strong inflows into spot exchange-traded funds (ETFs), and Microstrategy keeps on buying more Bitcoin, undeterred by the soaring prices. But, if retail traders jump on the bandwagon and start pouring into these pricey perpetual contracts at $72,000, there's a good chance market makers and arbitrage desks will stir up some volatility to cash in on those over-leveraged positions.
While a few big players can't really push Bitcoin's price down for the long haul, the reality of investors paying a 2.1% fee every week to maintain bullish bets brings a real risk of a domino effect of liquidations if there's a price dip. That said, with steady ETF inflows, it seems a bit off to predict a major price drop based just on the leverage scenario.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
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ZHIYUAN SUN
15 HOURS AGO

Israel announces plans for interest-bearing shekel CBDC

Although plans for a shekel CBDC have been in place since 2021, no pilot tests have since carried forward.
10796
24

2:03

NEWS
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Israel’s central bank will support a new Israeli shekel central bank digital currency (CBDC) that has the option of bearing interest.
In the March 11 announcement, the Bank of Israel outlined that its shekel CBDC will be implemented in a two-tier model, with instant, 24/7 payments, multipayment support, offline use, limitations on balances and an option for the CBDC to become interest-bearing. The central bank wrote:

“In the area of privacy, the architecture will allow the central bank, as the system administrator, to define the types of information required for the operation, control, and monitoring of the system. However, the central bank will not have access to personally identifiable information about end users’ balances and transactions.”

Currently, commercial banks in Israel pay 4.86% interest on customers’ fiat shekel deposits and savings. Under the central bank’s plans, banks would be able to hold the shekel CBDC as part of their short-term liquidity buffer, which would be non-interest bearing.
“The data structure must enable the system to comply with all of the assumptions defined in Section 2.1, including the ability to enforce holding restrictions and to apply interest,” researchers wrote, adding: “In particular, in a case where the interest is dependent on the type of user and the size of the balance, there is an advantage to having a centralized database.”
Israel has been contemplating the issuance of a digital shekel since 2021, but no concrete pilot tests have been actioned as of the time of publication. “Given the interdependence between the various components of the digital shekel system, the decisions are not final,” said the Bank of Israel.
In April 2023, Cointelegraph reported that the country’s central bank could issue a shekel CBDC if stablecoin use increases. “At this point, there are no signs of substantial adoption of stablecoins as means of payment in Israel,” the central bank said at the time.
Related: Local Web3 community launches ‘Crypto Aid Israel’ to help displaced citizens
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