Over the past 2 years, Bitcoin futures trading on the CME (Chicago Mercantile Exchange) has become increasingly important for institutional investors. However, a common misconception among traders is that they think the futures market is too important and its impact on the spot price. In addition, it should be noted that although trading in BTC tickers, CME futures contracts are paid financially and therefore are not related to the actual Bitcoin exchange.
Recently, the OI Bitcoin Option Contract is an extremely popular topic of discussion on crypto media and crypto Twitter but it seems that many investors are misinterpreting the way data and ideas work. Its meaning for Bitcoin price action.
Put simply, OI is the total number of futures held by market participants. For all transactions going through CME, customers must be willing to place long orders, hoping for an uptrend, while the other side will necessarily be short.
How should investors interpret futures data?
A common mistake is to consider lower daily trading volumes due to the lack of interest in derivatives by investors. If most market participants are holding their positions, there may be little or no trading activity even though both parties are involved.
Total OI and Bitcoin Futures volume on CME (USD) | Source: Skew
According to the chart above, from December to mid-February, OI increased sharply but what does this really mean?
Traders sometimes forget that the CME Bitcoin Futures expires monthly. Unlike Bitmex and Binance Perpetual Futures, futures contracts Bitcoin CME There is a fixed payment date which is always the last Friday of each month.
This may partly explain the reduction of OI in the last 2 weeks of February to 210 million USD compared to the peak of 339 million (-38%). Coincidentally, this move occurred when the uptrend became exhausted after the Bitcoin price increased by 55% since December 2019.
Volume of future contracts is still high
The average daily volume on the CME is 376 million over the past 4 months, although March tends to be 35% lower. In February, US Treasury Secretary Steven Mnuchin suggested that the cryptocurrency was being used as a “equivalent to the former Swiss secret digital bank”. This view may have contributed to limiting the proportion of institutional investors exposed to Bitcoin.
Usually, opinions from the Trump Administration as well as direct opinions of the president affect the psychology and decisions that investors make regarding their cryptocurrency investments. .
Although the average volume decreased during the past 10 sessions is still at 8% compared to Q4 / 2019, the trading volume of $ 1.1 billion on February 18 on CME seems to be an exception rather than the target. new.
The total volume of Bitcoin transactions – including regular exchanges – should also be taken into account. Follow report Bitwise's assets, the CME Bitcoin futures as a percentage of the average daily volume of the top 10 important spot markets increased significantly throughout 2019.
Bitcoin futures volume is expressed as a percentage of the total spot volume of Bitcoin | Source: BitWise Report – SEC
Institutional investors driving Bitcoin prices?
Many retail investors often say that institutional investors are pushing Bitcoin prices and there is some evidence to support this claim. First of all, OI $ 338 million (32,000 BTC) is a significant number compared to spot market activity. Less than a year ago, a 5,000 BTC order on Bitstamp was enough to cause 20% damage on every exchange, including CME.
In addition, a recent study by Arcane Research to explore Bitcoin's trading behavior before the expiry of CME futures shows that prices dropped an average of 2.3% prior to such events. In fact, this was true for the 15/20 months that Arcane Research analyzed.
Much more complex than we have ever heard
One important thing to remember is that causality is not in equilibrium. Although price movements before expiry are undeniable, there is no clear indication that institutional investors are the agents. Any trader other than CME can use the expiry calendar as a reason to reduce position or even short by using derivative tools. From a trader's point of view, it is not possible to confirm where the price action started.
The tool for making profit spreads on exchanges like derivatives occurs in microseconds. There is no way to determine whether an increase in transaction volume originates from a single place. In fact, some quantum traders use precision techniques to avoid detection. The only possible conclusion here is that institutional investors are pushing prices up / down just because of speculation.
Unfair derivative transactions for the field of cryptocurrencies?
Of course not. The launch of Bitcoin CBOE and CME futures in December 2017 marked the end of an unusual price gap between leading exchanges. According to Bitwise's report, such price spreads are currently below 0.1%, mainly due to new market participants and additional liquidity brought by derivative contracts.
Finally, every trader margin needs to trade and derivative instruments are designed to act as a hedging instrument, so their overall impact is beneficial. The existence of a regulated instrument that allows investors to place bets on the downside is evidence that market prices are not easily manipulated.
It is important to remember that every derivative transaction needs buyers and sellers. Price fluctuations occur simultaneously in many markets and this complicates the task of determining the cause. Therefore, investors who use derivative market data in their trading modes need to understand that reducing volume does not mean a lack of interest.
That may be true for the sudden drop in OI despite having to consider the expiration schedule and the strong price dynamics that caused liquidation of the position.
Price movements and OI may also be partly explained by the threat of the new regulation as recently announced by US Treasury Secretary Steven Mnuchin.
Disclaimer: This is not investment advice. Investors should research carefully before making a decision. We are not responsible for your investment decisions.
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