What next for Bitcoin’s derivatives market?

Open Interest on Chicago Mercantile Exchange has nearly doubled over the past 30 days. In fact, Aggregate Open Interest across top derivatives exchanges is up by 31%, with the response to Bitcoin’s steep rise in price evident when Deribit, BitMEX, and OKEx’s price charts are analyzed. 

Aggregate Open Interest || Source: Skew

Back in July and August 2020, the Open Interest was climbing towards $6 billion. If Bitcoin’s price continues to rise, the Open Interest may increase proportionately. On exchanges like the CME, where a high percentage of the Open Interest and trade volume is driven by institutional investors, the Open Interest is likely to touch $6 billion this time. 

In every market cycle, there are a few hiccups and corrections before a sustained price rise. At the time of writing, the price was up by 14% in 1 week. Further, it was 33% away from the previous ATH and there may be a few more corrections, before hitting the same level again. During these corrections, most positions, both long and short, get liquidated, with all having a negative impact on the larger trading sentiment. 

The said impact is observed when analyzing trade volumes across derivative exchanges as well. Based on data from Skew, the average aggregate trade volume on derivatives exchanges has increased consistently since May 2020.

Aggregate Daily Volumes || Source: Skew

Currently, the volume on derivatives exchanges is higher than the levels seen in September 2020. However, over a 3-month period, the volume seen in August was more sustained than in October 2020. A correction in Bitcoin’s price may lead to a drop in the current trading volume across exchanges. Spot exchanges are already choked for funds, and a drop in trade volume on derivatives exchanges may lead to a further drop in volatility.

If the pattern observed in 2017 repeats itself in 2020, there may be further corrections in November 2020, and buy positions may be the ones that get liquidated. At press time, the maximum hourly liquidations stood at $40 million. However, a month ago, the figure stood at $75 million.

Liquidated positions || Source: Skew

Contrarians end up taking opposing positions in the market and this strategy may actually turn out to be a winning one in such situations. Go long when they go short is one such contrarian view. So, as Open Interest responds to Bitcoin’s price, retail traders will speculate about which position to take to make the most of this rush.

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