Bitcoin’s price may have surpassed the $20,000 level, but the 40% decrease in volume indicates that the bearishers are still lurking.
Today, Bitcoin’s price (BTC) surpassed the $20,000 level and, in the process, set a record $7.9 billion of open interest in futures.
Although the price rose 74% over the last two months, the cumulative total of sellers‘ short position liquidations amounted to $4.3 billion, which is less than the $4.8 billion of those with long positions.
As shown in the chart above, the aggregate open interest in futures increased by 90% over the last two months. Therefore, it indicates that investors are increasing their positions, which in turn allows for even larger players to participate.
It is also worth mentioning that the Chicago Mercantile Exchange (CME) now holds over USD 1.3 billion in these contracts, undisputed evidence of the growing institutional participation in the BTC markets.
By observing the daily settlements, investors can better assess how traders have been using leverage. Unexpected price swings tend to cause a greater number of settlements than ongoing trends, such as Bitcoin’s recent breakout at USD 20,800.
Keep in mind that the largest candlestick represents the long (buyers) who forcibly closed their positions on November 26th when the BTC price dropped 14.4% in 12 hours. The breakout of the USD 20,000 resistance today caused USD 365 million to be liquidated in short positions, but this still does not coincide with last month’s USD 902 million bearish move.
Volume could not keep up with the new BTC high
The recent downward trend in volume is another reason for bearishers to celebrate. Bitcoin’s unadjusted total trading volume decreased by 40% over the last three weeks.
The average daily volume traded on Bitcoin spot exchanges reached $45 billion by the end of November and has since decreased to $25 billion. While there’s a possibility that the exchanges have inflated their volumes, there could also be some bearish maneuvers at play.
However, there was a similar 40% decline in Coinbase’s BTC/USD and Binance’s BTC/USDT markets. Therefore, bearish traders could expect such volume weakness to indicate a lack of confidence that the USD 20,000 level will become support.
Perpetual futures reflect excess leverage
Perpetual contracts, also known as reverse swaps, have a built-in commission that is usually charged every eight hours. The financing rates ensure that there are no exchange rate risk imbalances. Although the open interest of buyers and sellers is the same at all times, the leverage can vary.
When buyers (long positions) demand the most leverage, the financing rate becomes positive. Therefore, the buyers will be the ones who pay the commissions.
Sustained financing rates above 4% per week translate into extreme optimism. This level is acceptable during a market in a rising cycle, but problematic if the BTC price moves sideways. A high cost to hold a position could force buyers to reduce their positions and this would increase selling pressure.
In situations like these, the high leverage of buyers increases due to the high risk of cascading liquidations due to unexpected price drops.
Therefore, bearish traders could be holding their cards close to their chests, waiting for the best moment to test the market.
This may happen closer to the expiry of futures and options on December 25th or during weekends when the order books are not overloaded.