Author: CryptoVizArt, UkuriaOC, Glassnode; Translated by: Wuzhu, Golden Finance
Summary
Binance, Bybit, and OKX remain the industry leaders in the perpetual swap market, accounting for around 84% of total open interest.
We introduce a new model to track the sensitivity of futures market leverage and open interest relative to changes in spot Bitcoin prices.
Prices have risen back above the cost basis for short-term holders, providing much-needed assistance to new investors, with over 75% of supply having been converted back into profit.
Perpetual Futures Market
The perpetual futures market is the deepest and most liquid trading venue for digital assets. Trading volumes are typically orders of magnitude higher than the spot market, making it the tool of choice for executing trades, speculative positions, and arbitrage strategies.
In this section, we aim to introduce a framework for identifying market pivot points using perpetual futures markets. It attempts to identify points where over-leveraged speculators are liquidated during bull market corrections.
Open interest in perpetual futures ranged between 220,000 and 240,000 BTC in 2024. This value typically drops rapidly during deleveraging events and rises during more speculative periods. Recently, open interest has risen to the 260,000 to 280,000 BTC range, indicating high speculative interest since early June.
To better understand the mechanics of the perpetual swaps market, we measured the share of the top three exchanges by open interest.
As shown below, Binance, Bybit, and OKX account for approximately 84% of the market share, so we will focus on metrics related to these exchanges for our analysis.
Turning points in the perpetual contract market often result in a significant drop in open interest, often as a direct result of margin call liquidations for traders holding highly leveraged positions.
The chart below highlights the times when open interest on the top three exchanges dropped by more than 5% in a week. In the past 12 months, we have encountered 10 such perpetual liquidation events.
To assess the size of forced liquidations, we measured total liquidations during these deleveraging events. The chart below shows that total liquidations (long and short) spiked above a typical bull market baseline of $200 million per day. This demonstrates the role of margin call liquidations in the drop in open interest in the chart above.
Directional bias
Deleveraging events can occur during periods of market turmoil when the market moves in either direction. However, in this case, we specifically isolate potential pivot points during bull market corrections and therefore divide liquidations into two subsets:
Longs dominate liquidations, with more than 50% of liquidated positions belonging to long positions in the contract (green)
Shorts dominate liquidations, with more than 50% of liquidated positions being short of the contract (red)
During the recent sell-off to $55,000, we can see an ideal long liquidation candidate pivot point recorded. Here, over-leveraged long positions were liquidated, causing a sharp drop in open interest across the top three perpetual futures exchanges.
Next, we can build a framework to discover these pivot points using perpetual contract funding rates. This approach utilizes a 7-day moving average of funding rates across the top three exchanges.
This is a very insightful indicator that provides information about the directional bias of positions in the perpetual contract market. When the weekly average of the funding rate is above the neutral level (0.01% every 8 hours), it indicates that there is a strong demand from market takers to open long positions.
After setting the current ATH of $73,000 in March 2024, the demand for long positions in the perpetual contract market has been weakening. Apart from this, the sentiment briefly turned positive during the second attempt to break through $73,000 in May. However, since then, the overall sentiment has remained neutral to negative.
The latest bounce from the $54,000 region is a good example of overleveraged long positions being liquidated near local lows. The funding rate below the neutral level of 0.01% suggests that there has been no rush to open new long positions since the July lows were formed.
Short-term profitability improvement
The recent price surge has also brought relief to Bitcoin short-term holders (STHs), a proxy for new demand and recent buyers. This group of Bitcoin holders lost more than 90% of the Bitcoin supply in late July, putting them under financial stress.
The rally has now breached the STH cost basis and has left 75% of its holdings in unrealized profits. This can be seen in the STH-MVRV indicator, which has now returned above the breakeven level of 1.0.
We can increase the granularity of our assessment by examining the individual coin age breakdown of the short-term holder MVRV metric. We can use this perspective to understand how profitability has changed for subgroups of recent buyers. The coin ages we analyze range from recent buyers (1 day to 1 week) all the way to buyers who are about to turn into long-term holders (3 to 6 months).
1 day - 1 week MVRV: 1.05 (red)
1 week-1 month MVRV: 1.1 (orange)
January-March MVRV: 1.0 (blue)
March-June MVRV: 1.07 (purple)
Currently, all short-term holders have returned to profit, which highlights the strength of the current uptrend. This is likely to have a positive impact on the overall investor sentiment.
Finally, we can assess the net realized profit/loss for each subgroup, which can be considered a measure of net capital flows. This indicator also shows signs of constructive improvement, with capital flows in most coin age groups being positive, with the only exception being the January-March coin age group.
The January to March age segment has borne the brunt of recent range-bound volatility and downward price action, and is one of the larger age segments in this study.
Summarize
The perpetual futures market is the most liquid and deepest instrument in the digital asset market, making it a valuable source of market information. As BTC price dropped to the $53,000 region, it led to a major deleveraging event as many long traders were liquidated near the lows.
The price rebound was also very strong, leaving most short-term holders with unrealized profits. This provided much-needed financial help and was supported by a period of net positive capital inflows in recent weeks.
