Bitcoin (BTC) has experienced two rounds of futures market liquidations worth over $1 billion since December 5, despite its price starting and ending this period around $97,000. The most recent event brought Bitcoin's price down from $101,430 on December 8 to $94,200 on December 9, wiping out $2.9 billion from leveraged positions.
Although negatively impacting market sentiment in the short term, the Bitcoin derivatives market is currently in a healthier state, which is essential for triggering an unexpected price surge to new all-time highs. Traders tend to buy less when the market shows signs of overheating, such as a high funding rate in the Futures market.
Open interest in Bitcoin futures contracts | Source: CoinGlass
The total open interest (OI) in Bitcoin futures contracts has decreased by 8% from November 25 to December 10, from 663,700 BTC to 609,400 BTC. However, despite Bitcoin's price dropping $7,160 in 24 hours on December 9, the demand for leverage remains largely unaffected.
Funding rate of perpetual Bitcoin contracts every 8 hours | Source: Laevitas.ch
Funding rate peaked at 9% per month on December 5 but has been nearly zero since Bitcoin's price dropped to $94,200 on December 9, removing excessive leverage from retail investors – a factor that often causes chain liquidations.
The significant volatility of Bitcoin's price makes new investors hesitant and diminishes the appeal of the currency. However, reduced leverage helps reinforce the belief among holders that the recent price increase is a result of accumulation, particularly from institutional investors.
Bitcoin aims for additional gains as ETF inflows continue despite short-term concerns
Traders are concerned that Bitcoin's price may face pressure after rising 72% in three months, but this short-term analysis does not account for the fact that Bitcoin spot ETF funds in the U.S. have added $15.2 billion in assets since October 10, indicating strong demand.
MicroStrategy, Riot Platforms, and Marathon Digital (MARA) are active Bitcoin investors in recent weeks. From December 2 to December 8, MicroStrategy purchased 21,550 BTC at an average price of $98,783 per Bitcoin, totaling $2.1 billion. Meanwhile, mining company Riot Platforms raised $500 million through debt issuance, primarily to purchase Bitcoin. MARA also significantly increased its Bitcoin holdings, adding 11,774 BTC to its balance sheet during the same period.
Unlike retail traders, 'whales' and market makers remain optimistic as the monthly Bitcoin futures maintain a 15% premium over the spot price. Traders demand higher profit margins to compensate for longer settlement times, so a spread of 5% to 10% is considered neutral.
Annual premium for 2-month Bitcoin futures contracts | Source: Laevitas.ch
Although the annual premium of 21% on December 5 was too high, it has now stabilized compared to two weeks ago, indicating that any factors causing a sudden spike in leverage demand no longer exist. From a derivatives perspective, this situation paves the way for further bullish positions, supporting additional price increases.
Data reinforces confidence in positive outlook
To demonstrate that professional traders are not turning pessimistic, a trader betting that Bitcoin will exceed $100,000 by February 28 must currently pay 0.112 BTC, equivalent to $11,000, for a call option. This indicates that the derivatives market is pricing Bitcoin at $111,000 in less than 80 days.
Although the decrease in open interest in Bitcoin futures contracts is a positive signal, it would be naive to think that overly optimistic sentiment has completely disappeared from the market. While maintaining an optimistic attitude is not wrong, especially with the inauguration of elected President Donald Trump expected on January 20, traders in cryptocurrencies often rely on leverage, so price fluctuations can still cause unexpected volatility.
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