The rise in Bitcoin price to $42,000 is due to spot volume, not BTC futures liquidation

Over the past seven days, Bitcoin (BTC) has seen a whopping 14.5% increase, reaching a 20-month high of $41,130 on December 4th. Traders and analysts were abuzz with speculation, especially after the liquidation of $100 million worth of short (bearish) Bitcoin futures in just 24 hours. However, when we delve into the BTC derivatives data, a different story unfolds – a story that focuses on what is happening in the spot market.

BTC liquidation map

Enough shorts to bring it to $45,000-$46,000 pic.twitter.com/7O2zYD4j8Q

– Nik Algo (@nik_algo) December 4, 2023

The impact of recent liquidations on Bitcoin futures markets

While the Chicago Mercantile Exchange (CME) trades U.S. dollar-settled contracts against Bitcoin futures where no physical Bitcoin changes hands, these futures markets undoubtedly play a critical role in shaping spot prices. The sheer scale of Bitcoin futures, with a total open interest of $20 billion, underscores the keen interest of professional investors.

During the same seven-day period, just $200 million worth of BTC futures shorts were liquidated, representing just 1% of the total outstanding contracts. This figure pales in comparison to the significant trading volume of $190 billion during the same period.

Bitcoin futures aggregate open interest and volume, USD. Source: Coinglass

Even focusing solely on the CME, which is notorious for potential trading volume inflation, its $2.67 billion daily volume could have easily handled a $100 million 24-hour liquidation. This has led investors to consider whether the recent Bitcoin rally may be due to targeting by some whales in the futures markets.

$BTC Next possible plan

A quick rise to 42k-42.5k to chase the BSL of the shorts, then a quick flushout of the longs and we could see a $BTC decline to 39k-38.5k

A drop to 39k-38.5k would be a good buying opportunity for the final leg to 45k-47k before ETF approval pic.twitter.com/yc7k0hOBpZ

— VeLLa Crypto (@VellaCryptoX) December 4, 2023

One could try to estimate the extent of liquidations at different price levels using tape reading techniques. However, this approach does not take into account whether whales and market makers are adequately hedged or able to deposit additional margin.

Despite Bitcoin rising to a 20-month high, the futures and options markets appear to be relatively subdued. In fact, three key pieces of evidence suggest that there is no compelling reason to expect a cascade of short-term contract liquidations should Bitcoin break above the $43,500 threshold.

Bitcoin derivatives show no signs of excessive optimism

Perpetual contracts, also called inverse swaps, include an embedded interest rate that is typically recalculated every eight hours. A positive funding rate indicates increased demand for leverage on long positions, while a negative rate indicates the need for additional leverage on short positions.

Bitcoin Perpetual 8-hour average funding rate. Source: Laevitas.ch

The data shows a peak of 0.04% per eight hours on December 4, but that figure, equivalent to 0.9% per week, proved to be short-lived. The current weekly interest rate of 0.4% puts minimal pressure on longs seeking leverage, indicating a lack of urgency among retail traders. Conversely, the bears show no signs of exhaustion.

To assess whether Bitcoin perpetual swaps represent an anomaly, attention turns to monthly BTC futures contracts, which are favored by professional traders because of their fixed funding rate. Typically, these contracts trade at a 5% to 10% premium to reflect the extended settlement time.

Related: How to Prepare for the Next Crypto Bull Market – 5 Easy Steps

Annualized premium for Bitcoin 2-month futures. Source: Laevitas.ch

Data on fixed-term BTC futures contracts shows a peak premium of 12% on December 4, which currently stands at 11%. This level remains reasonable, especially given the prevailing bullish momentum. Historic rallies in 2021 have seen premiums rise above 30%, further challenging the notion of a rally driven predominantly by Bitcoin derivatives.

With the price of Bitcoin up 14.5% in just seven days and just $200 million worth of short futures contracts liquidated, the ultimate question is whether the bears used conservative leverage or the margin calls have carefully increased to secure their positions.

When looking at the funding rate and futures base rate, there is no clear indication that crossing $43,000 would trigger significant stock losses.

Essentially, the recent rise is supported by spot market accumulation and a decline in the available supply of coins on exchanges. According to Coinglass, exchanges recorded a net outflow of 8,275 BTC last week.

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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