Bitcoin Futures Open Interest Nears $24B: Are Bulls at Risk?

On February 20, Bitcoin reached a high of $53,000 before experiencing a slight correction, dropping to $50,750. Despite this drop, the open interest in Bitcoin futures contracts remains at $23.7 billion, only 2.5% below its all-time high in April 2021. This suggests that there is still strong demand for BTC futures contracts. Some traders believe that the increase in open interest indicates excessive borrowing, but this is not always the case. It is possible for an investor to be fully hedged even when using leverage by buying monthly BTC futures and simultaneously selling an equivalent amount of perpetual contracts.

The profile of Bitcoin futures traders has changed over time. In 2021, retail flow fueled by Binance led in BTC futures market share, while now CME dominates, made up primarily of institutional investors. This shift in market dominance reduces the likelihood of a sharp Bitcoin price correction driven by derivatives markets. While high open interest does increase the potential for cascading liquidations, it is less likely with CME contracts, which require a 50% deposit margin. Different exchanges also have varying levels of liquidation thresholds due to the conservative approach of Deribit traders compared to Bybit.

The optimism of professional traders can be gauged by looking at the Bitcoin futures premium, which should normally trade 5% to 10% higher than regular spot markets. The premium recently peaked at 17% on February 20 and currently stands at 14%, indicating that the drop in price did not dampen bullish sentiments. When looking at perpetual contracts (inverse swaps), which have an embedded rate recalculated every eight hours, there is no significant increase in demand for leveraged long positions.

Bitcoin’s price oscillation on February 20 and the liquidation of only $50 million in long futures contracts suggest that overall bullish leverage remains healthy. The modest premium in BTC perpetual contracts indicates that there is no excessive leverage from retail traders. Therefore, there is no indication of an imminent sharp correction triggered by leveraged long liquidations.