Demand for BTC futures soars to $35 billion, but option markets show no signs of excessive optimism.
BTC $73,250 hit an all-time high of $73,650 on March 13, marking a 44% gain in 16 days. The surge reflects the increasing demand for spot Bitcoin exchange-traded funds (ETFs) listed in the U.S., which saw a record $1 billion in net flows on March 12. Traders are questioning whether Bitcoin can reach $80,000, given that professional traders are continuing to add bullish leveraged positions.
Is Bitcoin being used as an inflationary hedge?
Some analysts argue that Bitcoin is being utilized as a hedge against U.S. monetary policy, especially following the 3.2% increase in the Consumer Price Index (CPI) in February compared to the previous year. Consequently, this puts pressure on the U.S. Federal Reserve (Fed) to refrain from cutting interest rates further, adding to the risk of an economic recession as companies have fewer incentives to expand and hire.
Conversely, if the pessimistic scenario materializes, with inflation accelerating and the Fed compelled to raise rates further, this could prove detrimental for risk-on assets, including Bitcoin. During periods of uncertainty, investors tend to seek refuge in short-term U.S. Treasury and cash positions, even if they have strong long-term convictions in the stock market or real estate.
Therefore, whether Bitcoin’s current bull run has the potential to surpass $80,000 hinges on the adoption of spot ETF instruments as a ‘store of value’ and a potential shift in Bitcoin’s risk assessment. Before 2024, Bitcoin was not easily accessible to the majority of mutual funds and wealth managers. Additionally, regulatory uncertainty and its classification as a commodity were major concerns, but this changed after the approval of the U.S. spot Bitcoin ETF on Jan. 11, 2024.
Over the past two weeks, U.S.-listed spot Bitcoin ETF products have attracted nearly $5 billion in capital, solidifying the industry as a top contender for institutional capital. Nonetheless, some analysts are concerned that the excessive leverage on Bitcoin futures poses a looming risk of liquidations and subsequent price corrections.
Bitcoin’s aggregate futures open interest reached its highest-ever level at $35 billion on March 13. Moreover, top traders at crypto exchanges continued to initiate leverage longs (buy positions). The long-to-short indicator consolidates positions across spot, perpetual, and monthly futures contracts, providing a comprehensive view of these traders’ bullish or bearish sentiment.
Exchanges’ top traders BTC long-to-short ratio. Source: Coinglass
The data suggests that whales and market makers at Binance and OKX increased their net long positions between March 10 and March 13. Furthermore, the consolidated metric reached its peak in 30 days, potentially indicating excessive confidence. However, it would be premature to conclude that the risk of a Bitcoin price crash has increased.
For instance, arbitrage desks might be using futures markets to anticipate strong inflows into spot Bitcoin ETFs, creating a temporary buffer for demand. Known as Authorized Participants (APs), these institutional investors are authorized by the issuer to create and redeem ETF shares. Hence, the increased demand for leverage could reflect a temporary situation due to the ETF inflow.
Bitcoin derivatives reflect moderate excitement
To confirm whether professional traders are overly confident, one should cross-check data from Bitcoin options markets. The 25% delta skew is a telling sign when arbitrage desks and market makers overprice upside or downside protection. In essence, if traders anticipate a Bitcoin price drop, the skew metric will rise above 7%, while periods of excitement tend to have a negative 7% skew.
Bitcoin 2-month options 25% delta skew. Source: Laevitas
The Bitcoin options’ 25% delta skew is currently hovering around optimistic levels, but still within the negative 7% range. Therefore, excessive optimism seems concentrated in futures markets, as put options trade at only a 6% discount compared to equivalent call options. Such data suggests that demand for Bitcoin futures does not imply reckless or heightened risks of cascading liquidation.
While there’s no guarantee that Bitcoin will surpass $80,000 in the near term, BTC derivatives metrics indicate confidence, as traders are pricing similar risks for unexpected upward and downward moves.
