On November 10, a significant shift occurred in the Bitcoin (BTC) market. The CME Bitcoin futures surpassed Binance’s BTC futures markets in terms of size, signaling a surge in demand from institutional investors. This shift has led to an anticipation of Bitcoin’s potential to cross the $40,000 threshold in the near future.
Unprecedented Growth of CME Bitcoin Futures
The open interest in CME’s current Bitcoin futures stands at a staggering $4.35 billion, the highest since November 2021 when Bitcoin reached its all-time high of $69,000. This is a clear indication of increased interest. However, the question remains, is this surge sufficient to drive further price increases?
There has been a remarkable 125% increase in CME’s BTC futures open interest from $1.93 billion in mid-October. This growth is undoubtedly linked to the anticipation of the approval of a spot Bitcoin ETF. However, it is important to note that there is no direct correlation between this movement and the actions of market makers or issuers.
Institutional Investors’ Options
Institutional investors have several alternatives to avoid the high costs associated with futures contracts. For example, they could choose CME Bitcoin options, which require less capital and offer similar leveraged long exposure. Additionally, regulated ETF and exchange-traded notes (ETN) trading in regions like Canada, Brazil, and Europe provide alternatives.
While it may seem imprudent for the world’s largest asset managers to take significant risks with derivatives contracts on a decision dependent on the U.S. Securities and Exchange Commission (SEC) and not expected until mid-January, the undeniable growth in CME Bitcoin futures open interest is hard evidence of increasing interest from institutional investors in the cryptocurrency market.
Signs of Extreme Optimism
Despite the steady rise in CME’s Bitcoin futures activity, the most significant development has been the spike in the contracts’ annualized premium (basis rate). In neutral markets, monthly futures contracts typically trade with a 5% to 10% basis rate to account for longer settlement times. This situation, known as contango, is not unique to cryptocurrency derivatives.
On Nov. 28, the annualized premium for CME Bitcoin futures surged from 15% to 34%, eventually stabilizing at 23% by day’s end. A basis rate exceeding 20% indicates substantial optimism, suggesting that buyers were willing to pay a substantial premium to establish leveraged long positions.
Currently, the metric stands at 14%, indicating that whatever caused the unusual movement is no longer a factor. It’s worth noting that during that 8-hour period on Nov. 28, Bitcoin’s price rose from $37,100 to $38,200. However, it’s challenging to determine whether this surge was driven by the spot market or futures contracts, as arbitrage between the two occurs in milliseconds.
Instead of focusing on intraday price movements, traders should look to BTC option markets data for confirmation of heightened interest from institutional investors. If traders anticipate a decline in Bitcoin’s price, a delta skew metric above 7% is expected, whereas periods of excitement typically result in a -7% skew.
Over the past month, the 30-day BTC options 25% delta skew has consistently remained below the -7% threshold, standing near -10% on Nov. 28. This data supports the bullish sentiment among institutional investors using CME Bitcoin futures, casting doubts on the theory of whales accumulating assets ahead of a potential spot ETF approval.
In conclusion, derivatives metrics do not indicate excessive short-term optimism. If whales and market makers were genuinely 90% certain of SEC approval, in line with the expectations of Bloomberg’s ETF analysts, the BTC options delta skew would likely be much lower.
Nonetheless, with Bitcoin’s price trading near $38,000, it appears that bulls will continue to challenge resistance levels as long as the hope for a spot ETF approval remains a driving force. For those who want to keep a close eye on these market movements, the cryptoview.io application provides a comprehensive view of the cryptocurrency market.
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