The bitcoin futures market may be signaling impending volatility with open interest for BTC currently above 250,000, which has historically signaled sharp price movements.
Perpetual Futures Open Interest has remained elevated above the 250,000 mark for much of January, reports Glassnode, a blockchain data analytics provider, in its weekly newsletter.
The futures market has garnered a great amount of attention from crypto enthusiasts with the launch of several bitcoin futures ETFs last year. A futures contract is an agreement to buy or sell an asset at a specific agreed-upon price on a particular date, and open interest refers to the total number of unsettled derivatives contracts in the futures market.
When there is elevated open interest, it indicates that the futures market is highly leveraged. When rapid price movements happen, it can cause the trader of the leveraged position to fall into the negatives. Within the crypto futures market, positions that are in jeopardy of hitting negative equity are forced to liquidate instead; it’s an automatic process that varies depending on the amount of leverage in a trade but triggers when specific price margins are crossed.
For positions that are less leveraged, minor corrections within the market typically don’t trigger immediate liquidations, whereas for highly leveraged positions, liquidation is a lot more likely.
Image source: Glassnode
In addition to the high open interest being seen in bitcoin futures, the funding rates turned to the negatives this week, indicating that short positions outnumber long positions. Long positions indicate an anticipation of rising prices from a particular point, whereas a short position expects prices to fall from a particular point. More long positions are often seen in bullish crypto markets, while more short positions indicate a bearish leaning market, but this isn’t always the case, particularly within crypto.
In addition to the bitcoin futures market being highly leveraged right now, there has been a decrease in trading volume, currently around $30 billion daily compared to the highs of $70 billion during the bull run of bitcoin futures with the launch of the first U.S. bitcoin futures ETFs. A thinner market can add to volatility, should price movements occur.
“With elevated future open interest, and a bias that appears to be a short heavy market, a risk of a deleveraging to the upside remains on the table,” writes Glassnode.
Investing in Bitcoin Futures With Valkyrie
For investors looking for bitcoin exposure through the futures market, the Valkyrie Bitcoin Strategy ETF (BTF) is a great way to invest in the innovation of the Bitcoin network without being directly invested in the cryptocurrency.
BTF is an actively managed fund that invests in bitcoin futures and has no direct exposure to bitcoin itself. The fund offers dual protections for investors via the CFTC regulation of the futures markets and the protections built into the fund itself as a 1940 Act ETF. BTF only deals in cash-settled, “front month” bitcoin futures contracts when possible, or else the next nearest expiration date.
The sub-advisor of BTF is Vident Investment Advisory, and the futures contracts are invested in indirectly through a Cayman Islands subsidiary so as to circumvent the need for a K-1 for tax purposes for investors, a common practice. The fund also utilizes collateral investments to attain liquidity; these include cash, cash-like instruments, or high-quality securities such as money market funds, U.S. bonds, and other sources.
BTF carries an expense ratio of 0.95%.
For more news, information, and strategy, visit the Crypto Channel.