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Update options and derivatives
One dynamic and chart that we have mentioned before is the ratio of bitcoin perpetual futures market funding to price. During the previous 2021 bull cycle, the perpetual futures (perps) market played a key role in moving short-term prices to both upside and downside with excessive leverage. There is a need to revisit the state of the derivatives market and the current leverage of the system as bitcoin price has dropped from its latest rally, following US stocks on a potential path towards new lows.
Since peaking in November 2021, the perpetual futures market has been trending down (neutral funding rate is 0.10%). Simply put, many market participants have been and still are in a bearish trend over the past eight months. Even in the latest bear market rally, that hasn’t changed. We don’t see funding breaking through the neutral zone, which is a clear sign that the long-term and risk-averse speculators haven’t returned to the market.
With the successful launch of a bitcoin futures ETF in the US markets last fall, coupled with a general downturn in speculative activity in the bitcoin/cryptocurrency markets, the perp funding rate has declined. move from neutral to short-term bias with less explosive moves in funding rates. While derivatives market dynamics have changed, it’s still worth watching for an actionable signal from the perps market, where short selling is heavily offside as it has been throughout history. history marks important lows. It should be noted that in previous bear market cycles (when new arrivals spot demand fell by willing sellers), capital stock could be negative in the long run, due to lack of demand for speculation/exploitation. use assets from the bulls.
Another way to visualize the funding rate is to look at the annual value with the current negative funding rate yielding an estimate of 3.32% over the long term versus most of the short term. Since the crash in November 2021, the market has yet to regain its neutral annual funding rate.
Prices have moved in a downtrend in the open interest futures market for USD since the market topped. That’s easier to see in the second and third charts below which only show the futures perps portion of all open futures contracts. The perps market accounts for more than 75% of open interest and has grown significantly from approximately 65% in early 2021.
Given the amount of leverage available in the perps market, it is understandable why the performance of the perps market has such a large impact on prices. Using a rough calculation of the total perps market volume from Glassnode of $26.5 billion per day (7-day moving average) vs. Messari’s real spot volume (Adjusted 7-day moving average for inflated exchange volumes) at $5.7 billion, the perps market trades almost five times the volume for the spot market. On top of that, daily spot volumes are down nearly 40% year-over-year, a statistic that helps to understand how much liquidity has left the market.
Given the volume of bitcoin derivatives contracts compared to the spot market, one can come to the conclusion that derivatives contracts can be used to hedge against bitcoin. We strongly disagree, given the dynamically priced interest rates associated with bitcoin futures products, we believe that over a sufficiently long time frame the influence of derivatives is neutral in terms of price. While bitcoin is much more likely to explode than it would otherwise be due to the reflex effect of leverage, those positions were eventually forced to close, so an equally negative reaction was absorbed by the market. consume.