Bitcoin’s Recent Surge: A Deeper Look at Derivatives and Spot Market Action

Bitcoin’s Recent Surge: A Deeper Look at Derivatives and Spot Market Action

Bitcoin has been on a remarkable run over the past seven days, surging by an impressive 14.5% and reaching a 20-month high of $41,130 on December 4th. This significant increase has left traders and analysts speculating about the factors behind this rally, especially after witnessing a $100 million liquidation of short Bitcoin futures within a 24-hour period. However, taking a closer look at BTC derivatives data reveals a different story, one that shifts the focus to spot market activity.

While the Chicago Mercantile Exchange (CME) facilitates USD-settled contracts for Bitcoin futures, where physical Bitcoin is not exchanged, these futures markets undoubtedly play a crucial role in shaping spot prices. It’s important to note the substantial scale of Bitcoin futures, with an aggregate open interest of $20 billion, highlighting the keen interest among professional investors. In stark contrast, the liquidation of BTC futures shorts amounted to a mere $200 million, representing only 1% of the total outstanding contracts. This figure pales in comparison to the substantial $190 billion in trading volume during the same timeframe.

Even when we focus solely on the CME, known for potential trading volume inflation, its daily volume of $2.67 billion should have easily absorbed a $100 million 24-hour liquidation. Consequently, investors are contemplating whether this recent Bitcoin rally may be attributed to the targeting of a few whales within the futures markets. It is tempting to try and gauge the extent of liquidations at different price levels using tape reading techniques. However, this method fails to consider whether whales and market makers are sufficiently hedged or have the capacity to deposit additional margin.

Despite the surge in Bitcoin’s price to a 20-month high, futures and options markets appear relatively subdued. Three key pieces of evidence support this notion, indicating that there is no urgent reason to anticipate a cascade of short contract liquidations if Bitcoin surpasses the $43,500 threshold.

Perpetual contracts, also known as inverse swaps, incorporate an embedded rate that is typically recalculated every eight hours. A positive funding rate suggests an increased demand for leverage among long positions, while a negative rate indicates the need for additional leverage among short positions. On December 4th, data reveals a peak funding rate of 0.04% per eight hours, equivalent to 0.9% per week. However, this level was short-lived, and the current 0.4% weekly rate exerts minimal pressure on leverage-seeking longs, indicating a lack of urgency among retail traders. In contrast, there is no sign of exhaustion among bears.

To further explore the calmness of Bitcoin derivatives, attention turns to BTC monthly futures contracts, favored by professional traders due to their fixed funding rate. Typically, these contracts trade at a premium of 5% to 10% to account for their extended settlement period. Current data on BTC fixed-term futures contracts reveals a peak premium of 12% on December 4th, currently resting at 11%. This level remains reasonable, especially considering the prevailing bullish momentum. Earlier rallies in 2021 witnessed premiums surging beyond 30%, further challenging the notion that the recent rally is predominantly driven by Bitcoin derivatives.

In light of Bitcoin’s surge, questions arise about whether bears utilized conservative leverage or diligently increased margin deposits to protect their positions. However, considering the funding rate and futures basis rate, there is no clear indication that surpassing the $43,000 mark would trigger significant stock losses.

Ultimately, the recent surge in Bitcoin finds support in spot market accumulation and a decline in the available supply of coins on exchanges. Over the past week, exchanges have recorded a net outflow of 8,275 BTC, according to Coinglass. This suggests that investors are holding onto their Bitcoin and not rushing to sell, further fueling the upward momentum.

While the $100 million liquidation of short Bitcoin futures brought attention to derivatives markets, it is important to analyze the broader context. Bitcoin’s surge is not solely due to aggressive liquidations in futures markets as spot market accumulation and decreased supply play vital roles in supporting this rally. As Bitcoin continues to experience highs, it will be fascinating to observe the interplay between derivatives and spot markets and how market dynamics shape the cryptocurrency’s future.


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