Bitcoin (BTC) price rebounded by 27% just three days after testing the USD 31,000 support and earlier today bull recaptured the USD 40,000 level.
This rapid recovery happened despite the digital asset facing one of the largest buy-side liquidations in one day as $ 1.5 billion was wiped off the books. Interestingly, futures contract traders seem to have returned with even greater appetites.
After such a major liquidation event, the increased appetite of futures traders is somewhat unexpected, but professional investors are adept at hedging their positions and executing complicated strategies with options.
To measure the impact of the recent liquidations and better understand how these futures traders are positioned, one should start by analyzing the outstanding interest. Large cuts in this indicator could show that traders were surprised and are currently unwilling to add positions.
As the above data indicates, open interest on BTC futures hit a record high of $ 13 billion on Jan. 14, up 74% from the previous month.
For those unfamiliar with futures contracts, buyers and sellers are matched at all times. Each long contract is betting on further benefits and has been traded against one or more entities willing to short it.
The futures markets have survived the crash test
Bitcoin’s rapid recovery from its recent low signals that either traders are risk takers and thus unaffected by those large price swings, or that most of this activity consists of hedging and arbitrage trades.
Hedge strategies are used to provide traders with protection. For example, selling futures contracts while simultaneously holding a larger BTC position in a cold wallet. Meanwhile, arbitrage strategies also involve little to no directional exposure, which means that price fluctuations do not affect trading performance. One could sell longer-term BTC futures contracts while buying the perpetual contract, with the aim of taking advantage of any price distortions.
The best way to analyze whether directional trades and leverage betting have dominated the scene is to look at the futures premium and perpetual futures funding rate.
These indicators tend to oscillate tremendously during unexpected price swings when there are leverage trades. On the other hand, those metrics will remain relatively stable if traders don’t have directional exposure as they mainly employ hedging and arbitrage strategies.
Perpetual futures funding rate barely moved
Perpetual contracts, also called inverse swaps, have an embedded rate, which is usually charged every eight hours. When buyers (longs) are the ones who demand more leverage, the funding rate becomes positive. Therefore, it is the buyers who pay the fees. This problem is especially true during bull runs, when longs are usually in higher demand.
As shown above, the funding rate has been ranging from 0% to 2% since January 5, indicating that no anomaly has occurred. Had there been moments of panic among perpetual contract traders, the rate would have shifted to the negative side, as those betting on the downside (shorts) would pay the fee.
The average weekly funding rate of 1% seems exceptionally modest given Bitcoin’s 74% rise in the past three weeks.
The premium for 3-month BTC futures is still high
Professional traders tend to dominate longer-term futures contracts with fixed expiration dates. Thus, by measuring how much more expensive futures are compared to the regular spot market, a trader can estimate how bullish they are.
The fixed calendar 3-month futures should usually trade at a premium of 2% or higher over regular spot exchanges. This equates to a return of 8% on an annual basis, which can also be interpreted as a lending rate as the seller is delaying settlement.
Anytime this indicator fades or goes negative, it’s an alarming red flag. Such a situation, also called backwardation, indicates that the market is turning bearish.
The chart above shows that the indicator is holding a minimum of 4%. Meanwhile, a rate of 5% translates to 21% on an annual basis, which is higher than most decentralized funding requests returning for stablecoin deposits.
Hence, the indicator flirts with overbought levels, indicating optimism from professional traders. These data are positive as the recent unexpected fluctuations have not reduced their appetite.
At this point, it is clear that recent volatility has not shaken off derivatives traders. Meanwhile, the growing open interest rate on futures and the 3-month premium indicate that there are no big bets on a downturn or lack of confidence in the market.
The views and opinions expressed here are solely those of the author and do not necessarily reflect Cointelegraph’s opinion. Every investment and every trade move carries risks. You should do your own research when making a decision.