Institutional investor demand for Bitcoin (BTC) was evident on November 10 when Chicago Mercantile Exchange (CME) Bitcoin futures flipped Binance’s BTC futures markets in terms of size. According to BTC derivatives metrics, these investors show great confidence in Bitcoin’s potential to break $40,000 in the near term.
CME Bitcoin Futures Open Interest, USD. Source: Coinglass
CME’s current open interest for Bitcoin futures is $4.35 billion, the highest since November 2021, when Bitcoin hit its all-time high of $69,000 – a clear sign of increased interest, but is it enough? to justify further price increases?
CME’s remarkable growth and spot speculation in Bitcoin ETFs
The impressive 125% increase in CME BTC futures open interest from $1.93 billion in mid-October is undoubtedly related to the anticipation of the approval of a spot Bitcoin ETF. However, it is important to note that there is no direct connection between this movement and the actions of market makers or issuers. Cryptocurrency analyst JJcycles put forward this hypothesis in a social media post on November 26th.
What if CME (US institutions) opened long positions to hedge against the potentially imminent #Bitcoin ETF approval?
Open interest in CME has certainly increased in recent weeks.
— JJcycles (@JJcycles) November 26, 2023
To avoid the high costs of futures contracts, institutional investors have several options. For example, you could choose CME Bitcoin options, which require less capital and provide similarly leveraged long exposure. Additionally, regulated ETFs and Exchange Traded Notes (ETN) trading offer alternatives in regions such as Canada, Brazil and Europe.
It seems a bit naive to believe that the world’s largest asset managers would take risks with derivatives contracts when a decision depends on the US Securities and Exchange Commission (SEC) and is not expected until mid-January. Nevertheless, the undeniable growth of open interest in CME Bitcoin futures is clear evidence that institutional investors are turning their attention to the cryptocurrency.
It may seem naïve to believe that the world’s largest asset managers with derivatives contracts would be taking significant risks if the SEC made a decision, which is not expected until mid-January. However, the undeniable growth in open interest in CME Bitcoin futures highlights the increasing interest of institutional investors in the cryptocurrency market.
CME Bitcoin futures signaled extreme optimism on November 28th
While CME’s Bitcoin futures activity continues to increase, the most notable development has been the increase in the annual premium (base rate) of the contracts. In neutral markets, monthly futures contracts typically trade at a base rate of 5% to 10% to accommodate longer settlement times. This situation, known as contango, does not only apply to cryptocurrency derivatives.
On November 28th, the annual premium for CME Bitcoin futures rose from 15% to 34% and finally stabilized at 23% at the end of the day. A base rate above 20% indicates significant optimism, suggesting that buyers were willing to pay a significant premium to establish leveraged long positions. Currently, the metric is at 14%, suggesting that the cause of the unusual move is no longer a factor.
It is worth noting that Bitcoin price rose from $37,100 to $38,200 in this 8-hour period on November 28th. However, it is difficult to determine whether this increase was caused by the spot market or by futures contracts, as the arbitrage between the two occurs in milliseconds. Instead of fixating on intraday price movements, traders should pay attention to BTC options market data to confirm increased interest from institutional investors.
Related: Why is the crypto market declining today?
When traders anticipate a decline in Bitcoin price, a delta skew metric of over 7% is expected, whereas periods of excitement typically result in a skew of -7%.
Deribit 30 day BTC options bias. Source: Laevitas.ch
Over the past month, BTC options’ 30-day delta skew of 25% has remained consistently below the -7% threshold and was close to -10% as of November 28th. This data supports bullish sentiment among institutional investors using CME Bitcoin futures, casting doubt on the theory that whales are accumulating assets ahead of possible spot ETF approval. Essentially, derivative metrics do not indicate excessive short-term optimism.
If whales and market makers were truly 90% confident that the SEC would agree, which is what Bloomberg ETF analysts expect, the BTC options delta skew would likely be much lower.
However, with Bitcoin price hovering around $38,000, it appears that bulls will continue to challenge resistance levels as long as the hope of spot ETF approval remains a driving force.
This article is for general information purposes and is not intended to constitute, and should not be construed as, legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.
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