Choppy Waters for Bitcoin

Today’s issue will give a brief update on the latest derivative market mechanics in the bitcoin market.

Bitcoin has been trading around its current range since mid-June, reaching lows of $17,500 and touching highs of $22,700. While in this range, the futures/derivatives market has continued to grow in size, leading us to believe that the eventual breakout from said range, whether to the upside or downside, will bring an explosion of volume and volatility. 

Shown below is the bitcoin price, the aggregate stablecoin margin perpetual futures open interest (the most liquid bitcoin contract/instrument), and the perpetual futures funding rate, a variable interest rate paid directly between long and short positions to keep contracts in line with the spot market price. 

The most obvious observation from the above charts would be that open interest ramped up along with price into the range highs, as momentum traders eagerly anticipated a breakout. Today’s move in particular is shown in closer detail below. 

Futures market open interest over the course of today’s move. 

It is also worth noting that as price and open interest rose, perpetual futures funding rates moved up toward baseline levels. Baseline rates for perpetual futures are 0.01% on most exchanges, meaning that with all else being equal, traders are charged a 10% APR to access leverage. This, of course, can change based on the positioning of the contract price relative to the spot market. 

For more information on the inner workings of funding and cost of capital in bitcoin futures contracts, read here. 

Up, Down or Sideways? 

As noted previously, aggregate bitcoin open interest has continued to build up as price consolidates in a range. What readers should look for is the coming move for equities going into earnings season. As the rolling one-week correlation with the Nasdaq shows, bitcoin’s price is still very much correlated with legacy market liquidity dynamics. 

Dylan LeClair 🟠 @DylanLeClair_

This amount of build up in OI usually means maximum wreckage. Feels like whatever way $SPX goes next will result in a large amount of volatility for $BTC. If equities continue the strong rally a nice short squeeze could result. If not, late longs become forced sellers.

Whichever way equity markets turn next over the coming days/weeks, expect crypto markets to follow, with a large amount of volatility. 

Lastly, here are previous funding rates in the bitcoin market for historical context. Note that bitcoin market bottoms are formed when derivative traders have shorted aggressively as spot market sellers have run out of ammunition. 

Given the amount of forced selling that has taken place in bitcoin/crypto markets in recent weeks, that could certainly be the case, but with various macroeconomic headwinds, it is impossible to know with any amount of certainty.