Bitcoin Price And Perpetual Futures Market – Bitcoin Magazine
Below is an excerpt from a recent issue of Bitcoin Magazine Pro, Bitcoin Magazine premium market’s newsletter. To be among the first to receive this insight and other market analysis on the bitcoin chain straight to your inbox, Subscribe now.
Update of options and derivatives
One dynamic and chart we’ve covered extensively before is bitcoin’s perpetual futures market funding rate versus price. In the previous bullrun of 2021, the perpetual (perps) futures market played a key role in moving short-term prices to both the upside and downside with excessive leverage. It’s worth reviewing the state of the derivatives market and the system’s current influence as the bitcoin price has broken down from its recent rally, following US stocks on a potential path to new lows.
Since the peak in November 2021, the perpetual futures market has been consistently biased to the downside (neutral funding rate is 0.10%). Simply put, several of the market participants were and remain biased short over the past eight months. Even during the recent bear market rally, that hasn’t changed. We did not see the funding rate move above neutral territory, showing a clear sign that long speculators and risk appetite have not returned to the market.
With the successful launch of a bitcoin futures ETF in US markets last fall, along with a general relaxation in speculative activity across the bitcoin/cryptocurrency market, perp funding rates have fallen from a neutral to short bias with much less explosive moves in the financing rates. Although the dynamics of the derivatives market have changed, it is still worth looking for an actionable signal from the perps market where the shorting bias goes heavily offside, as it has been shown to do throughout history, marking significant bottoms. It is worth noting that in previous bear market cycles (where new incoming spot demand was reduced by willing sellers) funding could remain negative for long periods, due to lack of demand to speculate/exploit the asset from the bulls.
In past bitcoin bear markets funding could remain negative for long periods due to lack of demand to speculate/exploit BTC.
Bitcoin price weighted by the perpetual funding rate is now around December 2020 levels.
Another way to visualize the funding rate is to look at an annualized value with the current negative funding rates yielding an estimated 3.32% to go long against most shorts. Since the crash in November 2021, the market has yet to return above the annual neutral funding rate.
An annualized value with today’s negative financing rates yields an estimated 3.32%.
The price has moved with the trend of falling futures market open interest in USD since the market peak. It is easier to see in the second and third charts below which only show perps futures market share of all futures open interest. The Perps market accounts for the lion’s share of open interest at over 75% and has grown significantly from roughly 65% at the start of 2021.
With the amount of leverage available in the perps market, it makes sense why perps market activity has such a large impact on price. Using a rough calculation of Glassnode’s total perps market volume of $26.5 billion per day (7-day moving average) versus Messari’s real spot volume (7-day moving average adjusted for inflated exchange volume) of $5.7 billion, trading the perps market almost five times the volume of spot markets. Additionally, daily spot volume is down nearly 40% from last year, a statistic that helps you understand how much liquidity has left the market.
Given the volume of bitcoin derivative contracts relative to spot markets, one can conclude that derivatives can be used to suppress bitcoin. We actually disagree, given the dynamically priced interest rate associated with bitcoin futures products, we believe that over a long enough time frame, the effect of derivatives is net neutral on price. While bitcoin likely exploded much higher than it otherwise would have due to the reflexive effects of leverage, these positions were ultimately forced to close, and thus an equally negative reaction was absorbed by the market.
