Anticipated Volatility as BTC Futures Interest Hits $36B

Bitcoin investors are no strangers to volatility. They often find themselves disappointed when a price surge is swiftly followed by a sharp correction that leads to forced liquidations in futures contracts, causing the price to plummet even further. Bitcoin futures are an important aspect of the market as they allow traders to utilize leverage, meaning that as the futures market grows, it has a greater impact on the price of Bitcoin. As of March 21, the total open interest in Bitcoin futures reached an all-time high of $36 billion, up from $30 billion just two weeks earlier. The leading market for Bitcoin futures, the Chicago Mercantile Exchange (CME), had an open interest of $11.9 billion, surpassing the inflow of U.S. spot Bitcoin exchange-traded funds (ETFs).

The launch of spot ETFs in the United States was expected to decrease Bitcoin’s volatility. Recent data suggests the opposite is true, as Bitcoin’s volatility has actually increased in the past four weeks. The 30-day volatility for Bitcoin reached its highest level in over 15 months, exceeding 80%. In comparison, the volatility of the S&P 500 index is 13%, while WTI oil futures stand at 23%. Even traditionally volatile stocks like Nvidia and Unity Software currently have volatilities of 72% and 59% respectively.

Bitcoin’s recent volatility can be seen in examples such as a 10% correction on March 19, followed by a 12% gain on March 20. This sudden price swing resulted in $375 million of forced liquidations in BTC futures contracts over two days. While this may not directly impact Bitcoin holders, it does influence the trajectory of the bull run and the perception of Bitcoin’s risk in the wider market.

Bitcoin futures, like any derivative instrument, have their pros and cons. They allow for leveraged bullish and bearish bets. While aggressive shorting of BTC futures may initially seem detrimental to the spot price of Bitcoin, these derivatives trades eventually need to be settled. This can result in a reversal of the trend and short-term buying pressure. This helps explain why high futures open interest is often associated with increased volatility.

Some analysts believe that the added volatility in the Bitcoin market is a result of excessive leverage, while others suggest it is due to “manipulation”. For example, one user alleges that market makers have been pursuing leveraged longs and shorts, as evidenced by stocks related to the sector gaining 7% on the day Bitcoin’s price crashed. It is difficult to determine the true intentions of each market participant.

To assess whether Bitcoin futures contracts have been used to exert negative pressure on the price of BTC, one can analyze the monthly contracts premium. These contracts are preferred by professional traders due to the absence of a funding rate. Sellers usually demand a 5% to 10% premium compared to spot markets to compensate for the extended settlement period. The BTC futures premium has remained above 16% for the past three weeks, which is typical of bullish markets. The premium has not significantly decreased even after a 17.6% decline in Bitcoin’s price between March 14 and March 20. This suggests that the demand for leverage on Bitcoin futures is primarily coming from buyers.

If Bitcoin’s price continues to decline, leveraged buyers may face forced liquidation, which could have significant consequences given the $36 billion open interest in Bitcoin futures.