The bitcoin futures market may signal impending volatility with open interest in BTC currently above 250,000, which has historically signaled large price swings.
Perpetual Futures open interest remained high above the 250,000 mark for much of January, Glassnode, a blockchain data analytics provider, reports in its weekly newsletter.
The futures market has garnered a lot of attention from crypto enthusiasts with the launch of several bitcoin futures ETFs last year. A futures contract is an agreement to buy or sell an asset at a specific agreed price on a specific date, and open interest refers to the total number of unsettled derivative contracts in the futures market.
When there is high open interest, it indicates that the futures market is highly leveraged. When rapid price movements occur, the leveraged position trader may fall into the negative. In the crypto futures market, positions that risk reaching negative equity are forced to liquidate instead; it is an automatic process that varies depending on the level of leverage in a trade, but is triggered when specific price margins are breached.
For less leveraged positions, minor corrections in the market generally do not trigger immediate liquidations, whereas for highly leveraged positions liquidation is much more likely.
Image source: Glassnode
In addition to the high open interest seen for bitcoin futures, funding rates turned negative this week, indicating that short positions outnumber long positions. Long positions indicate an anticipation of price rising from a particular point, while a short position expects prices to fall from a particular point. Longer positions are often seen in bullish crypto markets, while shorter positions indicate a bearish market, but this is not always the case, especially within crypto.
In addition to the highly leveraged bitcoin futures market at the moment, there has been a decline in trading volume, currently around $30 billion a day from highs of $70 billion during the bull run. bitcoin futures contracts with the launch of the first US bitcoin futures contracts. AND F. A thinner market can add volatility, if price moves occur.
“With high future open interest and a bias that appears to be a short-and-heavy market, upside deleveraging risk remains on the table,” Glassnode writes.
Investing in Bitcoin Futures with Valkyrie
For investors seeking exposure to bitcoin via the futures market, the Valkyrie Bitcoin Strategy ETF (BTF) is a great way to invest in Bitcoin network innovation without being directly invested in cryptocurrency.
BTF is an actively managed fund that invests in bitcoin futures and has no direct exposure to bitcoin itself. The fund offers dual protections to investors via CFTC regulation of futures markets and the protections built into the fund itself as a 1940 Act ETF. BTF only deals in cash-settled bitcoin futures, “first month”, where possible, or the next earliest expiry date.
BTF’s sub-advisor is Vident Investment Advisory, and the futures contracts are invested indirectly through a subsidiary in the Cayman Islands to circumvent the need for a K-1 for tax purposes for investors, a common practice. The fund also uses collateral investments to achieve liquidity; these include cash, cash-like instruments or high-quality securities such as money market funds, US bonds and other sources.
BTF has an expense ratio of 0.95%.
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