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Bullish uptrend intact as Bitcoin futures open interest hits $22.5B

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The price of bitcoin (BTC) rose 22.5 percent in March, but as the price rose, some buyers began to use excessive leverage, derivatives data show. Meanwhile, open interest in futures contracts reached a record $22.5 billion, leaving investors wondering if the current rally is sustainable.

Optimism, especially during a bull market, should not be considered alarmism. However, the yellow flag is waving if buyers are using excessive leverage, as this could lead to a major sell-off in the event of a sell-off.

6 hours chart BTC/USD. Source: TradingView

Following the launch of Bitcoin on 21. After peaking at $58,300 in February, a correction of 26% followed in the following week. This action wiped out more than $4.5 billion in futures contracts, virtually eliminating excessive leverage on the part of buyers, which was confirmed by the reduction of the annual premium of the one-month futures contract to 17%.

BT FuturesAggregated open interest in US dollars. Source: Bybt.com.

On the 13th. Open interest in BTC futures reached a record $22.5 billion in March, a monthly increase of 39%.

To assess whether the market is too bullish, we need to look at some derived measures. One is the futures premium (also known as the base premium), which measures the spread between futures prices and the regular cash market.

One-month forward contracts are normally traded at a premium of between 12% and 24% per annum, which should be interpreted as a borrowing rate. By delaying settlement, sellers charge a higher price, creating a price gap.

OKEx BTC 1-month futures contract premium. Source: Crouch.

Bullish uptrend intact as Bitcoin futures open interest hits $22.5B

The above chart shows that the base of bitcoin futures has reached a high of 60%, which is generally unsustainable. A base rate above 35% indicates excessive buyer leverage and creates the possibility of massive liquidations and subsequent market declines.

Note how this indicator corrected after the price of BTC fell from a high of $60,000 on the 13th. March had fallen. A similar move took place on the 21st. In February, BTC reached an all-time high of $58,300 and collapsed 22% in less than 48 hours. In the meantime, the reference rate has been adjusted to a neutral level of 16%.

An underlying of more than 24% is not necessarily a warning, but indicates high leverage on the part of futures buyers. This overconfidence is generally a greater risk when the market is down 10% or more from its peak.

It is also worth noting that traders sometimes increase leverage during a rally, especially on weekends, but then buy the underlying asset (bitcoin cash) to adjust the risk.

The change to $61,750 did not eliminate the sellers.

For those betting that bitcoin will reach $65,000 or more, it will be nice to know that open interest has risen 71% during the rally since February. This suggests that short sellers have likely fully hedged and are taking advantage of the futures premium, rather than actually expecting a decline.

In the strategy described above, professional investors essentially engage in cash and balance sheet transactions, simultaneously buying the underlying asset and selling futures contracts.

These arbitrage positions generally do not involve liquidation risks. Therefore, the current increase in open interest rates during a strong recovery is a positive indicator.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Cointelegraph. Every investment and every stage of trading involves risk. You should do your own research before making a decision.

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