BNB’s sharply rising futures open interest and regulatory issues are weighing on the altcoin’s price

The price of BNB is down 24.5% over the past 90 days, despite a 7% surge between July 10-11. BNB (BNB) has underperformed the broader altcoin market, suggesting that the underlying cause behind the bearish momentum is there.

It is highly likely that the correction in BNB price is due to the lawsuit filed by the U.S. Securities and Exchange Commission on June 5 against Binance and its CEO, Changpeng “CZ” Zhao, as the decoupling with coincides with this event.

BNB/USDT (blue) vs. altcoin market cap since April 2023. Source: TradingView

To gain a fuller understanding of the situation, analyzing derivative contracts provides valuable insight into the positions of whales and market makers.

Is the Recent BNB Price Rally Sustainable?

This analysis should highlight whether the move above $245 on July 11 is supported by improving sentiment or balanced demand for BNB derivatives leverage.

Price is undoubtedly the most important metric to understand trader sentiment, but it doesn’t encompass all possibilities. For example, between August 2022 and September 2022, BNB outperformed the altcoin market by 19%.

BNB/USDT (blue) vs. altcoin market cap at the end of 2022. Source: TradingView

Regardless of the reasons for BNB’s 2022 rally, one could conclude that the recent negative 24.5-day 90-day performance represents a mean reversion as investors no longer believe the premium is warranted is.

While no metric is perfect, one should first examine the open interest in the BNB futures markets for a comprehensive view of the demand for leverage during the recent underperformance.

BNB futures open interest has surged, but is it bullish?

In futures markets, long and short positions are always balanced, but a higher number of active contracts or open interest is generally positive as it allows institutional investors who need a certain market size to participate. Additionally, a significant increase in the number of contracts in play typically indicates greater trader involvement.

BNB futures aggregate open interest in USD. Source: CoinGlass

Notice how BNB futures open interest surged from $355 million on July 5 to the current $476 million, nearing its highest level in 18 months. This data leaves no doubt about the increasing demand for leverage using futures contracts.

The previous peak of open interest reached $490 million on November 5, 2022. Interestingly, the BNB price hit a six-month high that very day, followed by a significant correction of 28% in the following five days.

BNB/USDT price on Binance in late 2022. Source: TradingView

However, open interest does not necessarily indicate bullish or bearish sentiment among professional investors. The annualized futures premium measures the difference between longer-dated futures contracts and current spot market levels.

The futures premium or base rate should ideally be between 5% and 10% to compensate traders for “holding” their funds until the contract expires. Therefore, readings below this area are bearish, while readings above 10% indicate over-optimism.

BNB 3-month futures premium on an annual basis. Source: Laevitas

The current negative premium suggests that short sellers are paying 10% per year to hold their positions. While this data is consistent with typical bearish markets, it has been the norm rather than the exception for BNB. Additionally, similar instances of a negative futures premium of 10% occurred on March 17th and April 22nd, although they lasted less than a week overall.

BNB/USDT price on Binance. Source: TradingView

As for the price, March 18 marked the end of a bull run that peaked at $345, followed by an 11.5 percent correction to $306 over the next 10 days. When the BNB futures premium returned from the negative 10 percent mark on April 26, the BNB price fell 12 percent over the following 16 days.

BNB short positions may have been used to circumvent lock-up and lock-up periods

While it is impossible to establish causality and correlation, the data suggests that investors may be shorting BNB futures contracts to empty spot order books and potentially trigger price increases. Other possible explanations for a significant BNB futures premium include lock-up periods, during which BNB holders are not allowed to sell their positions but still try to reduce their risk.

These freeze periods may be due to formal contracts with current or former employees and partners, or smart contract restrictions. The agreements are usually token staking or guarantees for launchpads and similar projects. Therefore, trying to attribute this strategy to a single entity is rarely effective.

Derivatives data suggests increased interest in futures leverage, particularly short positions, given the negative premium. This is putting downward pressure on the price of BNB as long as the futures premium remains negative. While there is no guarantee that the price action will repeat itself, the current derivatives data does not support BNB’s bullish momentum.

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This article is provided for general informational purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of Cointelegraph.