Institutional demand for Bitcoin (BTC) became evident on November 10th as the size of the Chicago Mercantile Exchange (CME) Bitcoin futures market reversed that of Binance’s BTC futures market. According to BTC derivatives indicators, these investors are expressing strong confidence in Bitcoin’s ability to break through the $40,000 level in the near term.
CME’s current open interest in Bitcoin futures is $4.35 billion, the highest amount since November 2021, when Bitcoin hit an all-time high of $69,000, clearly indicating increased interest. But is it enough to justify further price increases?
CME’s impressive growth and spot Bitcoin ETF speculation
The astounding 125% jump in CME’s BTC futures open interest from $1.93 billion in mid-October is undoubtedly tied to expectations for 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. Cryptocurrency analyst JJcycles raised this hypothesis in a social media post on November 26th.
What would happen if CME (a US financial institution) opened long to hedge the spot? #bitcoin Is ETF approval imminent?
CME’s open interest has certainly surged over the past few weeks.
— JJcycles (@JJcycles) November 26, 2023
To avoid the high costs associated with futures contracts, institutional investors have a variety of options. For example, you could choose her CME Bitcoin option, which requires less capital and offers similar leveraged long exposure. Further alternatives include regulated ETFs and exchange-traded securities (ETNs) traded in regions such as Canada, Brazil, and Europe.
It seems somewhat naive to believe that the world’s largest asset manager will rely on the U.S. Securities and Exchange Commission (SEC) to make risky bets with derivative contracts, based on a decision not expected until mid-January. It seems to me. However, the undeniable growth in CME Bitcoin futures open interest is solid evidence that institutional investors are turning their attention to cryptocurrencies.
It may seem naive to think that the world’s largest asset manager would take on significant risks in derivative contracts, based on a decision expected to be up to the SEC in mid-January. However, the undeniable growth in CME Bitcoin futures open interest highlights the growing interest of institutional investors in the crypto market.
CME Bitcoin futures signaled extreme optimism on November 28th
CME’s Bitcoin futures trading has been steadily increasing, but the most notable move has been a sharp increase in the contract’s annualized premium (basis rate). In neutral markets, monthly futures contracts typically trade at a basis rate of 5% to 10% to allow for longer settlement times. This situation, known as contango, is not unique to cryptocurrency derivatives.
On November 28, the annualized premium on CME Bitcoin futures soared from 15% to 34%, eventually stabilizing at 23% by the end of the day. If the basis rate is above his 20%, it indicates considerable optimism and suggests that the buyer is willing to pay a significant premium to establish a leveraged long position. doing. Currently, this indicator is at 14%, indicating that the factors that caused the abnormal movement are no longer a factor.
It is worth noting that in a span of 8 hours on November 28th, the price of Bitcoin rose from $37,100 to $38,200. However, because arbitrage between the spot market and futures contracts occurs in milliseconds, it is difficult to determine whether this spike was driven by the spot market or futures contracts. Rather than getting hung up on intraday price movements, traders should keep an eye on BTC options market data to confirm increased interest from institutional investors.
Related: Why is the cryptocurrency market falling today?
If a trader expects the price of Bitcoin to fall, the delta skew indicator can be expected to exceed 7%, but during periods of excitement, the skew is typically -7%.
Over the past month, the 25% delta skew of the 30-day BTC option has been consistently below the -7% threshold and was close to -10% as of November 28th. This data supports the bullish sentiment among institutional investors using CME Bitcoin futures. The theory that whales are accumulating assets ahead of potential spot ETF approval is questionable. By their very nature, derivative indicators do not indicate undue short-term optimism.
If whales and market makers were truly 90% sure of SEC approval, as expected by Bloomberg ETF analysts, the delta skew of BTC options would likely be much lower.
Nevertheless, with Bitcoin price trading around $38,000, bulls will likely continue to challenge resistance as long as expectations for spot ETF approval remain the driving force.
This article is for general informational purposes only and is not intended to be, and should not be taken as, legal or investment advice. The views, ideas, and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
