Bitcoin futures open interest at 3-month highs — But will it be enough to overcome $50K?

Published at: Aug. 26, 2021

Bitcoin (BTC) futures open interest has recovered to May levels, raising optimism about a potent bullish breakout move above $50,000.

The total number of outstanding futures contracts on the Deribit exchange reached $1.37 billion on Monday, its highest level since May 27. Meanwhile, the difference between the Bitcoin spot rate and its futures contract price widened, edging up its three-month basis (annualized) back to June levels, data provided by Stack Funds shows.

The investment management firm saw the recovery as a sign of investors reentering the Bitcoin market while adopting a “more risk-on approach.” According to its head of research, Lennard Neo, the “contango trading” of the Bitcoin futures reflected that “investors’ sentiments remain skewed towards bullishness.” He wrote in a report:

“More importantly, we have observed consistent strength in bid momentum versus the offers, leading us to believe that markets will be well-supported at least in the near term, with further consolidation before breaking $50,000.”

Retail’s influence on Bitcoin’s price

In June, Bitcoin futures collapsed under the weight of a brutal sell-off in the world’s largest cryptocurrency spot market. The downside move from $41,322 to $28,800 expunged the basis trade, wherein a trader buys Bitcoin in the spot market and sells long-dated futures to lock in the disparity between the two prices.

So it appeared, leveraged futures traders unwound their long positions to meet margin calls — that is, via automatic liquidation mechanisms on exchanges. That reduced the gap between the Bitcoin futures prices and the spot, raising fears of negative premium on futures contracts, also called backwardation.

On Deribit, the three-month basis (annualized) was around 2.5%. But in ideal “contango” circumstances, futures should trade at a 5%–15% annualized premium according to the stablecoin lending rate.

Cointelegraph reported that the June drop had less to do with long liquidation and more with miners’ capitulation. It cited China’s crackdown on regional crypto firms around the same time Bitcoin prices plunged, noting that the decision forced crypto miners to shut down operations abruptly and, in turn, sell their Bitcoin holdings en masse to cover losses.

$50,000 a psychological barrier

Entering August, Bitcoin has brushed aside most mining concerns, with a recent Glassnode report indicating that miners have started reaccumulating tokens. Meanwhile, persistently high inflation reports in the United States have also boosted Bitcoin’s safe-haven narrative among accredited investors.

That partially explains why Bitcoin bottomed out near $29,000 and rose back to $50,000 in over a month. It also underscores the spike in futures open interest and basis trading, signaling renewed buying interest among investors and traders alike.

But Neo saw a potential glitch. The researcher highlighted Bitcoin’s recent failure to close above its psychological resistance at $50,000, noting that it could put the brakes on its imminent rally. He added:

“The fact that the 3-month basis has not broke June levels and is still way off Apr levels suggests that real demand and speculation remain conservative.”

Bitcoin was trading at $46,888, about 7.78% below its sessional high of $50,505, at the time of writing.

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