Bitcoin for the first time on March 11th, soared above $72,000, recording a 9.5% increase over the past week. The rally showed significant volatility with an intra-day increase of 4.8% to $70,055 on March 8th, followed by a 5.9% drop to $65,935. Bitcoin bulls are cautious about celebrating all-time highs due to the increase in futures contracts through futures trading.
What’s Happening on the Bitcoin Front?
Analysts point out that the $35.8 billion in open positions in Bitcoin futures represents a risk due to investors’ general overconfidence in futures markets. While this data confirms investor interest, it cannot naturally be considered bullish since long and short positions in futures always match, creating volatility rather than directional trends.
It’s important to note that the Chicago Mercantile Exchange currently has the largest share in Bitcoin futures, surpassing central crypto exchanges like Binance, Bybit, and OKX. However, this was not the case when Bitcoin was trading around $69,000 in November 2021, and open interest in Bitcoin futures reached its last peak, followed by a 31.5% drop within just 30 days.
When expressed in Bitcoin, the open interest is still 27% below its peak in October 2022. Nevertheless, the current open interest of 495,380 Bitcoins in futures is significant enough that price volatility could trigger increases. This was clearly seen when $325 million in Bitcoin long and short positions were liquidated in the futures market on March 4th.
Futures Market and Bitcoin
On March 11th, the funding rate for Bitcoin perpetual futures contracts reached a weekly rate of 2.1%, indicating a peak not seen in over 18 months. Individual investors often prefer these contracts as they closely follow spot market prices, but these contracts feature a variable futures fee known as the funding rate. Essentially, a positive rate indicates investors are weighting more towards long positions in futures contracts.
Bitcoin bulls have the advantage of strong inflows into spot exchange-traded funds, and Microstrategy continues to buy more Bitcoin unaffected by rising prices. However, if individual investors start flocking to altcoin projects and these expensive contracts at the $72,000 level, market makers and arbitrage desks are likely to create some volatility to cash out these positions.
While a few major players cannot pull down Bitcoin’s price in the long run, the reality of investors paying a 2.1% fee every week to maintain bullish predictions raises the risk of a domino effect of liquidations in the event of a price drop. However, predicting a major price drop based solely on the futures scenario seems somewhat incorrect with stable ETF inflows.
