Bitcoin Futures Positions At 2 Month High As Traders Go Short

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The number of open positions in bitcoin futures traded on major exchanges, including Binance and the Chicago Mercantile Exchange, continues to increase, and what appears to be a proliferation of short sellers indicates a gloomy mood in the market. This can lead to higher volatility.

Open interest, or the number of futures contracts traded but not cleared with an offsetting position, reached 397,873.36 BTC on Tuesday, reaching the highest tally since May 18, according to data from the analyst firm. Glassnode blockchain. The dollar value of the number of contracts opened remained stable at around $ 12 billion.

When measured in-kind, the metric has increased by over 100,000 BTC since the end of May. According to experts, the rise in open interest indicates that traders have opened short or short positions against a background of flat to negative price action in the cryptocurrency. Bitcoin has mostly traded between $ 30,000 and $ 40,000 over the past two months, with the exception of a few short-lived dips to $ 29,000.

Related: Bitcoin Bounces Above $ 30,000, Resistance Seen At $ 34,000

“In my opinion, these are mostly short futures, given the persistent negative funding rates in the perpetual markets over the past few weeks as well as the backward traded futures markets,” said Shiliang Tang, Director. investments from LedgerPrime, a $ 130 million crypto hedge fund. CoinDesk.

The perpetual market has seen negative rates consistently since mid-May.

Calculated every eight hours, the funding rate refers to the cost of holding long / short positions in the perpetual bitcoin market (futures without expiration). The metric is used by exchanges offering perpetuals to balance the market and guide perpetual prices towards the spot price.

A positive fund rate means longs are paying shorts to keep the position open, and the market is bullish. Meanwhile, a negative funding rate implies bearish market positioning.

Related: Bitcoin Recovers $ 31,000 As Traditional Markets See Risk Reset, BNY Mellon Makes Crypto Push

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The three-month base, or the difference between the price of three-month futures and the spot price, has recently turned negative, turning into what is known as the offset, a sign of bearish sentiment among futures traders.

“Institutional investors seem very cautious at the moment and in general appear to be reducing their risk,” Arcane Research said in a weekly research note published Tuesday. “Futures premiums in the unregulated offshore derivatives market are also trending towards zero, with FTX still trading at a slight premium.”

One question is whether the rise in open interest results from management-independent arbitrage strategies, which involves buying bitcoin in the spot market against a short position in the futures market. The strategy seeks to take advantage of the term premium, which evaporates as expiration approaches and converges with the spot price on the day of settlement, creating relatively low risk returns for the carry trader.

However, the usual cash-and-carry strategy has lost its luster with single-digit or backwardation premiums against the record low of 40% in mid-April.

Some traders anticipating a bullish rally and an increase in the term premium may have used a “reverse cash-and-carry” strategy by selling bitcoins in the spot market against a long term position.

“The increase in reverse cash-and-carry positions could have sparked open interest, but I doubt that is the main driver,” said Rahul Rai, managing partner of Gamma Point Capital. “So overall, it looks like there is some decent short-term interest at these levels.” Gamma Point Capital operates a market neutral fund.

Tang of LedgerPrime said reverse cash-and-carry strategies look quite unattractive with single-digit annualized premiums. Additionally, Tang pointed to the low bitcoin borrowing rates offered by loan-borrowing protocols as evidence of low demand for bitcoin borrowing and a short position versus a long position in the market at term.

All things considered, the futures market is predominantly bearish, leaving the door open for strong corrective increases in the price of bitcoin. When leverage is tilted to the bearish side, an upward movement often results in the forced closing of short positions (trades oppose shorts). This, in turn, puts upward pressure on the price of the cryptocurrency, leading to exaggerated price movements. “A rally could wind them up,” Rai said.

Bitcoin is currently trading at $ 31,400, which is a 5% gain on the day.

Also Read: Bitcoin Recovers $ 31,000 As Traditional Markets See Risk Reset, BNY Mellon Makes Crypto Push

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