Nov 7, 2023

Open interest in Chicago Mercantile Exchange (CME)'s bitcoin (BTC) futures has surged 35% in four weeks, which could suggest a turning point for bitcoin prices.

Video transcript

You've been waiting for shark week. Nah, forget that it's trading week at coin desk and we're taking a closer look at how crypto traders are finding an edge as Bitcoin has gained roughly 25% in just four weeks trading near $35,000. Joining us. Now to discuss is Coy Desk markets team, co managing editor, I'm Car. Good bully. Welcome mom. Car. Good to see you again, man. Yeah. Yeah. After a long time. Thanks for having me way too long. So, uh ok. I wanna, I wanna kick this off. You have a chart from Tom mcclellan. He's the editor of the mcclelland Market Report. Um It shows that there's been a steady uptick here in open interest recently. Another spike. Um What does this all mean? What, what exactly does the open interest tell us about? And this is that the CME correct? The Chicago mercantile Exchange. This is their contract, regulated contract, futures contract. What does this all tell us about the crypto markets right now? Yeah. So, so what we are seeing right now is a good old, uh you know, bump in open interest on the CME futures and the chart we have here is for the standard contract, which is sized at 55 B DC per contract. And it's kind of considered a proper for institutional activity and the open interest or as they say, you know, the notional dollar value locked in the number of active contracts, it has gone up by something like 30% in just four weeks. And the popular inference is that, you know, if the open interest is rising, it means traders are taking bullish bets, but that's not necessarily the case because you open interest doesn't tell you anything about the positioning of traders. Yeah, that they could be taking shots, they could be taking loans or you know, they, they they might be taking delta neutral trades like they might be selling futures against long position in the spot market right here. What's happening, you know, is the, as we can see on the chart, the open interest every time the open interest rises by double digits within just a few weeks, we tend to get a turnaround in the Bitcoin spot price. It happened in uh I think in late 2022 it marked the bottom. The July talk that we saw early this year was also accompanied by a sharp uptick in the cm open interest. So the similar pattern is likely to play out now, now that we have such a sharp rise in open interest, it's kind of, you know, if there is, if you're a bullish trader. It's kind of a right time to maybe scale back your risk and anticipate a healthy price pullback. Ok. So I, I kind of want to get to that in a second because that, that's an important point. But, uh, looking at this open interest simultaneously, we're seeing a decline in open interest or at least I, I don't want to say an immediate decline. But certainly, uh, when we look at Binance, when we look at, which is kind of a different set up than what the CME has. Uh we're seeing sort of a long term decline in its market share of futures contracts compared to the CME. So while we're seeing a spike in CME contracts, that doesn't necessarily mean that the futures market is suddenly exploding. It might be taking some market share away from Binance. Can you explain if that's necessarily the case here or if like what's going on? Yeah. Yeah, absolutely. You're absolutely right. So that's one of the main reasons why cma's share in the total futures market has increased because traders are not trading futures on finance as they used to maybe at the height of the bull market in 2021. But one point to note here is that there are two different markets on B one is the standard futures market and another as the perpetual futures market. So Binance share in the standard futures market has gone down, but it continues to retain, it remains the biggest exchange for the perpetual futures. And also during the recent run up, like Bitcoin went up by around 27% last month. While open interest on the CME increased the open interest on finance and all other exchanges, it actually went down. So it's a sign that the traders are not unanimously bullish across exchanges. Most probably what happened is few traders probably took bullish bets on, on CME. And what we saw on Binance and other exchanges is that the shots were crowded out and that's why the open open Binance and other exchanges declined. Ok. So I kind of want to get back to the your initial point here that, that this uh initials, that this spike in open interest somehow sig signifies the top. Could you walk us through that idea? Because I I it's sort of it, it's a, you know, maybe go through it a little bit again because it might not be clear uh for somebody who's just looking at this might not be familiar with, with, with what it all means. Yeah, it doesn't necessarily mean we are going to see an interim top. All that chart tells you is that, you know, here is the historical data that every time you open internet search by double digits or triple digits within a short period of time, maybe a couple of weeks. What we have is the prevailing trend in the Bitcoin changes. So if Bitcoin is rallying. And if the open interest suddenly rises, it will, it will probably see a market correction if Bitcoin is falling as it was in late 2022. And if there is a sudden spike in open interest, it will change direction and it will start moving higher over the last 23 years, this has consistently happened. So, you know, if history is a guide, the the latest spike in the open might be, you know, an advance indicator of impending price pullback. All right. And Omkar, your latest article for coin desk dives into taking some lessons from, go talk to us about what you wrote there. Yeah, so coming back to one of the catalysts for the Bitcoins rally has been the spot edf optimism like traders probably are positioning for an eventual approval of us based Edf by January or February. And there are forecast that it's going to bring, bring in billions of dollars of investor money into the Bitcoin market, boosting its market value. But if we look at what happened in gold in 19 seventies when the US government actually allowed, you know, ownership of the yellow metal gold, actually, you know, it rallied in the lead up to the announcement and then it crashed by something like 40 40% in the next 12 months. And that's because the expected flows did not materialize. So you can call it a classic by the rumors and the fact kind of trade and Uh If, if we, if we focus on how gold be behave that time, you know, it's quite likely that, you know, if the flows do not materialize Bitcoin might also see a notable price correction once uh uh the SEC, even when the SEC approves a spot ID F. All right, Omkar, thank you for joining us this morning and providing that insight for trading week. Thanks that coin desk markets team, co managing editor Amkar Goli. Don't miss more trading me coverage on coindesk dot com. Presented by CME Group.

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