First Mover: What’s Going On With Bitcoin Derivatives?

Surging open interest on bitcoin futures and options contracts might well be a sign that a breakout could be imminent.

Jun 25, 2020 at 12:34 p.m. UTC
Updated Sep 14, 2021 at 8:56 a.m. UTC

There's a strange trend in crypto derivatives right now: volumes have dropped precipitously, just as open interest has boomed. What's going on?

Since the May 11 halving event, trading volume in crypto futures has fallen 76%, from $35 billion to $8.5 billion by June 23, according to research firm Skew

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Futures trading activity hit an all-year low Sunday after slumping to just $5 billion. 

Options activity may have hit a high at $226 million on June 2, but activity has still gone south. Volume came in at around $80 million June 23, down nearly 62% from its peak. 

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Derivative trading volumes usually increase during periods of pronounced volatility. On March 12, when the bitcoin price fell by nearly 40%, daily volumes clocked a record $45 billion. 

A fall in trading volumes could, therefore, be down to the fact bitcoin has been pretty dull recently.

Prices have stuck to a narrow $9,000 to $10,000 range since May 11; bitcoin has so far failed to hold its own above the crucial $10,000 threshold. 

Bitcoin's volatility hit an eight-month low earlier this week. 

But while the number of settled contracts remains at a yearly low, open interest - the number of contracts that have yet to settle - remains high. 

Open interest in futures came to $3.8 billion, on June 23, up 50% from $2.5 billion from the start of May. On CME, open interest has risen by a staggering 1,145% since the halving, hitting a record of $436 million on June 23.

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In options, total open interest has consistently hit new highs almost every day for the past four weeks. At $1.1 billion on May 23, it hit $1.7 billion on Tuesday. 

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Investors may be adding bets to position for a big move in either direction, which is often seen following a prolonged consolidation.

In traditional markets, options traders often take “straddles,” a non-directional strategy comprises buying both calls (bullish bets) and puts (bearish bets). That could be the reason for the recent rise in the open interest in options. 

While options markets are still new in crypto, it might be that the same thing is happening here. The uptick in open interest indicates that the market is betting on a breakout - whether that's up or down still hasn't been decided yet.

Tweet of the day

Bitcoin watch

BTC: Price: $9,226 (BPI) | 24-Hr High: $9,421 | 24-Hr Low: $9,002

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Trend: Bitcoin defended key support early Thursday, keeping the immediate neutral bias intact. 

The biggest cryptocurrency by market value absorbed selling pressure around $9,000 and is now trading largely unchanged on the day near $9,270, according to CoinDesk's Bitcoin Price

The price bounce has saved the day for the bulls, as acceptance below $9,000 would have meant a downside break of the multi-week long trading range of $9,000 to $10,000. A range breakdown often invites stronger selling pressure, leading to deeper losses. In bitcoin's case, it would have opened the doors for a decline to the 200-day moving average (MA) at $8,300.    

While the cryptocurrency has staged an impressive recovery from crucial support, the bias remains neutral, as resistance at $10,000 is intact. The cryptocurrency has failed multiple times over the past five months to establish a strong foothold above that level. 

That level, however, could come into play if the global equity markets reverse losses seen on Wednesday. At press time, the futures tied to the S&P 500 are reporting a 0.40% decline. 

U.S. stocks collapsed on Wednesday with Dow Jones Industrial Average losing more than 800 points as number of coronavirus cases spiked.

Bitcoin's positive correlation with the stock markets has strengthened over the past two months due to the resurgence of Covid-19 fears. 

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