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Sub-$10K Bitcoin price caused $653M open interest drop, largest since March

05 Sep 2020


Pro traders bullish sentiment softened after Bitcoin futures open interest fell in tandem with traditional markets which also recorded notable losses. Bitcoin (BTC) futures open interest just had its most extensive daily reduction in five months. Yesterday's 11% drop move caused more liquidations than May 9 when BTC plunged 12.5% to $8,600.

Skew data shows total open interest down by $653 million, reaching $4 billion on Sept. 3. That figure includes perpetual (inverse swaps) and futures with set expiry on OKEx, CME, Binance, and remaining derivatives exchanges.

Yesterday’s move was the largest daily drop since the horrendous $1 billion cascading liquidation on March 13 caused a 50% drop in Bitcoin price. That same day marked the worst sell-off of the Dow Jones Industrial Average since 1987, a 10% drop.

The drastic correction might not have been such a record negative for stock markets, but the Nasdaq Composite tumbled 5%, led by Apple (AAPL -8%), Salesforce (CRM -7.8%), and Microsoft (MSF -6.2%).

Apple (AAPL) shares slid 8% on Sept. 3, causing its market capitalization to recede by $180 billion. This was the most extensive daily loss for a single company. By comparison, currently Bitcoin’s market capitalization stands at $194 billion.

The iPhone maker is currently valued at slightly over $2 trillion. Such an impressive figure could acquire the entire altcoin market, paying a 1.300% premium to the current $140 billion altcoin market capitalization.

The futures premium temporarily vanished

Futures markets tend to trade at a slight premium to regular spot exchanges. This is not something exclusive of cryptocurrencies markets, but rather a derivatives effect. By postponing the financial settlement for a trade, sellers usually demand more money.

This futures contracts premium indicator is known as basis and it usually ranges between a 5% to 15% annualized rate. Whenever the premium is positive, the market is characterized as in contango. On the other hand, a zero to negative future contracts premium is unusual and indicates bearish sentiment.

The above chart shows how significant yesterday's brief sub-$10K drop was on futures markets. Such a negative premium situation, known as backwardation, was last seen four months ago on May 10. Back then, Bitcoin (BTC) quickly recovered over the following three days, causing the basis indicator to regain positive territory.

The current 4% annualized basis can't be deemed bearish, although undeniably not bullish as the 10% level from three days ago.

Short-term options are back to bearish levels

Bitcoin option markets are also susceptible to significant price changes. Similar to the futures market, the recent BTC dip caused major risk aversion movements. Market makers often increase spreads during periods of volatility, thus, what happens on the following day is most telling.

The 25% delta skew indicator compares similar call (buy) and put (sell) options side-by-side. The indicator will turn negative when put options premium is higher than similar-risk call options. Such negative skew translates to a higher cost of downside protection, indicating bullishness.

The opposite holds when market makers are bearish, causing the 25% delta skew indicator to gain positive ground.

Although numbers are different depending on how far those options expiry is, short-term ones usually display a more considerable impact. Yesterday's sharp Bitcoin (BTC) drop caused the 1-month 25% delta skew to rise above 10%. As the above chart shows, ranges from -10% (slightly bullish) to +10% (somewhat bearish) are usual.

It seems premature to conclude that options markets are displaying bearish sentiment, especially when analyzing longer-term options. Nevertheless, large traders and market makers seem to be risk-averse right now, at least for pricing downside protection options.

Bitcoin derivatives remain healthy

Despite the Bitcoin futures open interest drop, it's aggregate notional value of $4 billion remains higher than two or three months ago. The same can be said by the current futures 4% premium (basis), which is far from bearish backwardation levels.

One should keep in mind that cryptocurrencies markets are incredibly volatile, and negative stock market swings also impact investors. No further evidence is needed after the two most largest BTC futures liquidation events happening on the exact same day of historical stock market crashes.

Those events prove that even uncorrelated markets may eventually reach peaks and valleys at similar times regardless of their different drivers. The current global macroeconomic scenario seems to be the most dominant force driving risk assets, including Bitcoin.



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