CME Bitcoin futures set new record, but uncertainty clouds $36K threshold

4:06 am
November 4, 2023
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On November 1, the open interest of Bitcoin futures on the Chicago Mercantile Exchange (CME) hit an all-time high of $3.65 billion. This figure represents the total value of all contracts in play for the remaining calendar months, where buyers (longs) and sellers (shorts) are matched continuously.

Bullish sentiment in CME Bitcoin futures, but cautious approach in BTC options markets

The number of active large holders reached a record 122 during the week of October 31, indicating a growing institutional interest in Bitcoin. Additionally, the premium for Bitcoin CME futures reached its highest level in over two years.

In neutral markets, the annualized premium typically falls between 5% and 10%. However, the current premium of 15% for CME Bitcoin futures stands out, suggesting a strong demand for long positions. This also raises concerns, as some may be relying on the approval of a spot Bitcoin exchange-traded fund.

In contrast to the positive sentiment in CME futures, Bitcoin options markets reveal an increasing demand for protective put options. The put-to-call open interest ratio on the Deribit exchange has reached its highest levels in over six months.

Deribit Bitcoin options put-to-call ratio. Source: Laevitas

The current level of 1.0 signifies a balanced open interest between call (buy) and put (sell) options. However, further analysis is needed as investors may have sold the call option to gain positive exposure to Bitcoin above a specific price.

Regardless of the derivative market’s demand, Bitcoin’s price ultimately relies on spot exchange flows. For example, the rejection at $36,000 on November 2 resulted in a 5% correction, bringing the price down to $34,130. Interestingly, the Bitfinex exchange experienced daily net BTC inflows of $300 million during this movement.

As noted by analyst James Straten, the whale deposit coincided with the declining momentum of Bitcoin, suggesting a potential connection between the two movements. However, the downturn did not breach the $34,000 support level, indicating the presence of real buyers at that level.

Bitcoin’s recent correction occurred while the Russell 2000 Index futures, which measure mid-cap companies in the United States, rose by 2.5% and reached a two-week high. This suggests that Bitcoin’s movement was unrelated to the U.S. Federal Reserve’s decision to maintain interest rates at 5.25%.

In addition, the price of gold remained stable at around $1,985 between November 1 and November 3, indicating that the world’s largest store of value was unaffected by the monetary policy announcement. The question remains: how much selling pressure do Bitcoin sellers at $36,000 still possess?

Reduced Bitcoin availability on exchanges can be misleading

Merely assessing current deposits at exchanges does not provide a clear picture of the availability for short-term selling, as shown by the $300 million daily net inflow to Bitfinex. A lower number of deposited coins may be a reflection of diminished investor confidence in exchanges.

In addition to the legal challenges faced by Coinbase and Binance from the U.S. Securities and Exchange Commission for unlicensed brokerage operations, the FTX-Alameda Research incident has raised more concerns among investors. U.S. Senator Cynthia Lummis recently called on the Justice Department to take swift action against Binance and Tether for their alleged involvement in facilitating funds for terrorist organizations.

Lastly, the cryptocurrency market has experienced increased returns from traditional fiat fixed-income operations, while once lucrative cryptocurrency yields have disappeared following the Luna-TerraUSD collapse in May 2022. This movement has had long-lasting effects on the lending sector, leading to the collapse of several intermediaries, including BlockFi, Voyager, and Celsius.

Currently, there is unquestionably growing institutional demand for Bitcoin derivatives according to CME futures data. However, this may not be directly connected to lower spot availability, making it challenging to predict the supply between $36,000 and $40,000, a level that has not been tested since April 2022.