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Bitcoin Futures Reaches a Record High is This a Bad Sign for The Price of BTC

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Bitcoin Futures Reaches a Record High is This a Bad Sign for The Price of BTC

The increasing need for leverage among traders may foster the ideal environment for cascading liquidations.

On March 11, Bitcoin (BTC) reached a record high of $72,000, indicating a 9.5% rise in the previous week. The surge has been very volatile, as evidenced by the 4.8% intraday increase to $70,055 on March 8 and the 5.9% decline to $65,935.

BTC bulls are, therefore, hesitant to celebrate this new all-time high, especially given the spike in leverage demand via BTC futures contracts.

The surge in demand for Bitcoin futures is not inherently positive

The $35.8 billion in open interest in Bitcoin futures has drawn the attention of analysts, who note that traders frequently depend too heavily on leveraged bets.

 Bitcoin futures

Although the data indicates that investors are still interested, it cannot be considered intrinsically bullish because futures longs (buying) and sellers (shorts) are always matched. Rather than producing directional bias, this scenario produces volatility.

Not to be overlooked is the fact that the Chicago Mercantile Exchange (CME) currently owns a larger portion of Bitcoin futures than more established cryptocurrency exchanges like Binance, Bybit, and OKX. However, this was not the case when open interest in Bitcoin futures peaked in November 2021 at about $69,000. In the 30 days that followed, BTC saw a loss of 31.5%.

The Bitcoin open interest is still 27% behind its peak from October 2022 when represented in BTC. However, the 495,380 BTC in open interest in futures contracts at this time is significant enough to cause sudden increases in volatility when the price of Bitcoin changes. This was made clear on March 4, when a startling $325 million in long and short-leveraged Bitcoin positions were cashed.

Analyzing the monthly contracts for Bitcoin futures is necessary to see whether the demand for leverage is mostly toward purchases. These agreements typically trade at a marginal premium above the spot markets because sellers demand a higher price to delay settlement. As is typical in financial markets, BTC futures should trade at an annualized premium of 5 to 10%, a situation known as contango.

financial markets

Demand for leveraged BTC long bets is increasing, as evidenced by recent statistics when the premium broke the 10% neutral barrier four weeks ago. The premium is currently around 21%, frequently indicative of overconfidence. It reached 23%, the highest level in over 18 months. It’s too soon to declare the current futures premium unsustainable, though, given that Bitcoin’s price has increased 40% in the last two weeks. This is especially true given that premiums have exceeded 45% in previous bull markets.

Retail traders who purchase more than $72,000 can encourage more volatility.

The financing rate for perpetual contracts involving Bitcoin futures hit a record high of 2.1% per week on March 11—a level not seen in more than 18 months. Because these contracts closely mirror spot market values, retail traders frequently like them. However, there is a catch: a variable leverage fee called the funding rate. Simply put, a positive rate indicates that traders use leverage more frequently for long positions.

spot market

Strong inflows into spot exchange-traded funds (ETFs) benefit Bitcoin bulls, and despite the skyrocketing prices, Microstrategy continues to purchase additional Bitcoin. However, there is a strong likelihood that market makers and arbitrage desks would create some volatility to profit from those highly leveraged positions if regular traders board and begin flooding the market with investments in these costly perpetual contracts at $72,000.

The fact that investors must pay a 2.1% weekly charge to keep optimistic bets raises the possibility of a chain reaction of liquidations if prices decline, even though a few influential players cannot truly drive down the cost of Bitcoin over time. However, given the consistent inflows into ETFs, it is impossible to forecast a significant price decline based on the leverage scenario.

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