Blockchain
Decoding Bitcoin’s Decline in Notional Open Interest to $30 Billion
Notional Open Interest in Bitcoin (BTC) Futures and perpetual futures, a crucial indicator of market sentiment, fell about 18% from $37 billion to $30.2 billion in a month, along with a 14% drop in the cryptocurrency’s spot market price, according to the data source. Coin glass.
At first glance, the data indicates that leveraged long or bullish bets anticipating a price increase have squared over the past four weeks. In other words, BTC’s price decline is being reinforced by the unwinding of bullish bets.
This interpretation could be, at best, partially correct and mask the bullish tendencies of the market.
Open interest refers to the number of active or open contracts at a given time, and notional open interest is calculated by multiplying the number of units in a contract by its current spot price. Therefore, changes in the asset price have an impact on notional open interest even if the total number of contracts remains stable, thus painting a misleading picture of market activity.
This seems to be the case with the BTC market.
According to Coinglass, open interest has remained stable above the 500,000 BTC mark for four weeks. Meanwhile, perpetual funding rates charged by exchanges every eight hours have remained consistently positive, indicating a propensity for bullish bets.
The combination of steady open interest in BTC and positive funding rates, coupled with declining notional open interest, suggests that some traders have set new long positions, offsetting the perceived unwinding of bullish bets by other market participants.
According to Laurent Kssis, crypto ETF specialist at CEC Capital, this is a sign that traders are still not hesitant to place long positions.
“This assumption is actually correct. Also, more hedge strategies are being deployed as the market remains very uncertain. Don’t forget that the late liquidity washouts were decent enough to push the market below the $60K mark. Hesitation to place long orders is not yet dominant, but hedging is a pretty large part of trading.”
Perhaps traders are hoping that once the selling pressure from Mt. Gox and miners’ redemptions has worn off, bitcoin will resume its uptrend, keeping pace with the Nasdaq.
A similar conclusion can be drawn from the constant positive spread between futures and spot prices, commonly called the basis.
“The basis has come down a bit but is still interesting, so there is still demand for long positions as part of the basic tradeand expectations of a turnaround are strengthening as macroeconomic tailwinds build and as selling pressure is likely to dissipate soon, investors may be building up strategic long positions while funding rates are low,” Noelle Acheson, author of the Crypto Is Macro Now newsletter, told CoinDesk.
Spot and options market activity also suggests a bullish bias.
Cryptocurrency exchange Bitfinex was the source of bullish pressure during the price decline, according to Griffin Ardern, head of options trading and research at cryptocurrency trading platform BloFin.
“Bitfinex whales bought the dips [in the spot] “Since late June, but I haven’t seen similar signals in other derivatives markets,” Ardern told CoinDesk.
Margin positions on Bitfinex, which involve using borrowed funds to buy an asset on the spot market, have risen steadily since June.
Meanwhile, traders have begun buying long positions in the options market, according to QCP Capital.
“Despite the sell-off, the options market is still heavily biased towards the topside, suggesting that the market is still anticipating a year-end rally. This is consistent with the desk’s observation of significant buying interest in long-dated options at the $100K/$120 strike. [calls]QCP said in a market update on Wednesday.