The open interest for Bitcoin futures on the Chicago Mercantile Exchange (CME) reached a new record high of $3.65 billion on November 1st. This figure takes into account the total value of all contracts that are still active for the remaining months of the calendar year. It shows that there is a high level of activity and interest in Bitcoin futures trading.
The number of active large holders of Bitcoin also rose to a record 122 during the week of October 31st. This indicates a growing institutional interest in the cryptocurrency. In addition, the premium for CME Bitcoin futures reached its highest level in over two years. A premium is the amount by which the futures price exceeds the spot price of Bitcoin. The current 15% premium for CME Bitcoin futures suggests that there is a strong demand for long positions, meaning traders are betting on the price of Bitcoin going up. However, this also raises concerns as some traders may be relying on the approval of a spot Bitcoin exchange-traded futures (ETF), which has not yet happened.
Despite the bullish sentiment in the Bitcoin futures market, the options market tells a different story. Evidence from Bitcoin options markets shows a growing demand for protective put options. The put-to-call open interest ratio at the Deribit exchange reached its highest level in over six months. A put option gives the holder the right to sell Bitcoin at a specific price, providing protection against a price decline. The high level of demand for protective put options suggests that some traders are hedging their bets and are cautious about a potential decline in the price of Bitcoin.
While the futures and options markets provide valuable insights into investor sentiment and trading activity, ultimately the price of Bitcoin is determined by spot exchange flows. For example, when the price of Bitcoin was rejected at $36,000 on November 2nd, it led to a 5% correction, bringing the price down to $34,130. Interestingly, the Bitfinex exchange experienced daily net inflows of $300 million during this price movement. This suggests that there were buyers stepping in at the $34,000 level, preventing a further decline in the price.
It is worth noting that Bitcoin’s movement was not influenced by the U.S. Federal Reserve’s decision to maintain interest rates at 5.25%. While the price of Bitcoin was correcting, the Russell 2000 Index futures, which measure mid-cap companies in the U.S., were gaining 2.5% and reaching a two-week high. This indicates that the movement in Bitcoin’s price was unrelated to broader market factors such as interest rate decisions.
Another factor to consider when analyzing the supply and demand dynamics of Bitcoin is the availability of the cryptocurrency on exchanges. Simply looking at the number of coins deposited at exchanges does not provide a clear picture of short-term sale availability. It is possible that a lower number of deposited coins reflects lower investor confidence in exchanges. This could be due to legal challenges faced by exchanges such as Coinbase and Binance, as well as concerns raised by U.S. Senator Cynthia Lummis about their involvement in facilitating funds for terrorist organizations.
Furthermore, the cryptocurrency market has been impacted by increased returns from traditional fiat fixed-income operations. This has led to a decrease in the yields offered by cryptocurrencies, making them less attractive for investors. Additionally, the collapse of the Luna-TerraUSD in May 2022 has had lasting effects on the lending sector, leading to the collapse of several intermediaries including BlockFi, Voyager, and Celsius.
In conclusion, there is a growing institutional demand for Bitcoin derivatives, as evidenced by the record high open interest in Bitcoin futures on the CME. However, it is difficult to predict the supply of Bitcoin between $36,000 and $40,000, a level that has not been tested since April 2022. The cautious demand for protective put options in the Bitcoin options market suggests that some traders are hedging their bets and are concerned about a potential decline in the price of Bitcoin. Ultimately, the price of Bitcoin is influenced by spot exchange flows and factors such as regulatory challenges faced by exchanges and the performance of traditional markets.