Bitcoin Price Insights from Open Interest on Futures

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Bitcoin performed well over the last month. The crypto asset is up nearly 80% from its Mar. 14 low, despite a bleak outlook for the global economy. Further supporting the bullish outlook, according to some analysts, is a recent surge in Bitcoin futures open interest. Closer inspection, however, shows a more nuanced picture.

Open Interest Bullish, on the Surface

Retail derivatives account for most of the volume in the market, but even open interest on CME futures increased by 50% over the last month.

CME’s derivatives data, aggregated by Skew, highlights institutional exposure to Bitcoin via futures. Since Mar. 17, institutions went from a negative 1,800 BTC position (short) to a positive 85 BTC (long) position on Apr. 7.

Do keep in mind that CME volumes tend to be much lower than volumes on crypto-native derivative exchanges, like BitMEX. That said, futures volume on CME tends to represent institutional sentiment in the space.

Institutional exposure to BTC on CME Futures, via Skew

Open interest can act as a signal for traders because it shows how many new derivatives contracts are getting created. As open interest increases, it means more traders are entering the market, and that demand for futures is rising.

When BTC prices and open interest rise simultaneously, it’s a clear sign that market participants are bullish.

BTC futures aggregated open interest
Open interest in USD decreased when the market crashed, and increased as the price of Bitcoin rebounded, via Skew

On the surface, the data may appear bullish. But when measured in BTC, open interest is actually falling.

Derivative Flows Flat in BTC

If Bitcoin’s open interest is rising only because of recent price appreciation, the data may actually be a bearish indicator.

For some BTC contracts, like XBTUSD, BitMEX’s perpetual swap trading pair, open interest hit a weekly high of 80,000 BTC as Bitcoin fell from $7,200 to $6,800, and promptly fell to 72,000 BTC once prices found support.

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BitMEX XBTUSD price chart
XBTUSD price over the last month, via Skew

Over the last month, BitMEX’s open interest has increased in USD but stayed flat in BTC. This is a fairly bearish signal, meaning not too many traders are entering new positions, even as Bitcoin’s price remains strong.

BitMEX XBTUSD deposits open interest chart
Open interest increased in BTC, but came during dips in price, via Skew

From this perspective, the drop in open interest from $5.5 billion in February 2020 to below $2 billion in March 2020 might simply be a result of decreases in Bitcoin’s price. 

As earnings season approaches for the North American stock market, there is further reason to believe that Bitcoin is in for more downside. Negative results for the S&P 500 threaten to pull Bitcoin’s price down with it, given that the correlation between the two assets hit historic levels this month. 

Though, this correlation is slowly tapering off, which could prove to be bullish for Bitcoin, but there isn’t enough evidence to effectively predict how correlation will change in the future.

CoinMetrics Pearson correlation coefficient between BTC and the S&P 500
BTC and S&P 500 correlation. Source: CoinMetrics

Institutional traders using CME seem to be bullish on Bitcoin, while the retail masses at BitMEX have not increased their exposure to Bitcoin futures.

If the BTC price continues to consolidate between $6,000 and $7,000, and open interest in BTC, not USD, doesn’t pick up traction, it may signal another leg down for the crypto market.

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