Bitcoin derivatives market evokes memories of 2021 surge

Optimism in the cryptocurrency is rising amid hopes of spot ETFs.

A burst of activity in Bitcoin derivatives has evoked memories of the period in late 2021 when the token surged to an all-time high.

Variables such as the cost of perpetual futures trades and options open interest point to a revival in speculative gusto for Bitcoin, which has more than doubled in price this year in a partial rebound from a 2022 rout.

The increased attention stems partly from expectations that the first US spot Bitcoin exchange-traded funds may soon get regulatory assent, opening up the asset to more investors. The likely level of ETF inflows is an open question but the possibility of greater demand is enough to spur chancy trades.

A spokesperson for Deribit, the largest crypto options exchange, said the notional value of Bitcoin options open interest on the platform reached a record of roughly $14.9 billion earlier this week. That topped the $14.4 billion achieved in October 2021 just before Bitcoin hit its high of almost $69,000. Open interest refers to outstanding contracts that have yet to be settled.

“Crypto call options were in strong demand for the past few weeks,” said Caroline Mauron, co-founder of digital-asset derivatives liquidity provider Orbit Markets. While some traders placed leveraged bets on a “large breakout” to $100,000 or beyond, the more immediate test is the $38,000 level, she said.

Bitcoin neared $38,000 on Thursday before falling back and was trading at $36,264 as of 3:33 p.m. in Singapore on Friday. Three charts below highlight key trends from the futures and options market for the largest digital token.

FOREVER FUTURES

Perpetual futures are among the most popular Bitcoin derivatives as they have no set expiry date. Exchanges use the so-called funding rate to align the contracts to the underlying spot price. In bullish periods the rate tends to be positive, indicating traders betting on gains are prepared to pay funds to speculators who are short, as a cost of maintaining their positions.

The rolling, seven-day average funding rate for Bitcoin perpetual futures through Nov. 15 was around levels last seen in the final quarter of 2021, a period when Bitcoin was rallying toward its zenith, according to CryptoQuant data spanning a range of digital-asset exchanges.

CURVE SHIFT

Traders analyze Bitcoin futures curves for clues about the price outlook. The entire curve based on CME Group Inc. contracts has shifted upward compared with the pattern seen a month ago. Whereas the curve back than sloped up to almost $32,000 for the farthest contract, it now rises to nearly $40,000.

The notional value of Bitcoin futures open interest on the CME, the world’s leading derivatives exchange, recently surpassed the equivalent figure for Binance. Binance is the largest crypto exchange but faces a web of regulatory probes in key jurisdictions, including the US.

CME open interest for Bitcoin futures reached $4 billion on Friday versus $3.8 billion on Binance, Coinglass figures show.

The growth in CME open interest relative to Binance “suggests a more substantial institutional participation in using futures to obtain long exposure to Bitcoin,” said Le Shi, head of trading at market making and algorithmic trading firm Auros.

OPTIONS INSIGHT

Figures from Deribit show a preponderance of bullish options bets on Bitcoin hitting $40,000 and even $45,000 by the end of December. Given that the traders selling the call options are willing to take the other side of the wager, that suggests $40,000 could become a key test area for Bitcoin’s rally.