Bitcoin traders anticipate volatility as BTC futures open interest tops $36B

Bitcoin investors are always waiting for and excited by volatility but seldom enjoy it when a price pump is followed by a sharp correction that triggers forced liquidations in futures contracts and amplifies the downside price movement. Bitcoin futures play an essential role since traders can use leverage; thus, the larger this market becomes, the greater its price impact.

The aggregate Bitcoin futures open interest reached a $36 billion all-time high on March 21, up from $30 billion two weeks prior. Moreover, the market leader, the Chicago Mercantile Exchange (CME), achieved an $11.9 billion open interest, surpassing the inflow of United States spot Bitcoin exchange-traded funds (ETFs) since their inception.

Bitcoin’s volatility increased after the spot ETF launch in the U.S.

Despite the successful debut of spot ETFs, some analysts anticipated reduced volatility, given that these instruments trade over $3 billion per day on average. However, recent data indicates the opposite, as Bitcoin’s volatility has increased in the last four weeks.

Bitcoin’s 30-day volatility surged above 80%, marking its highest level in over 15 months. For comparison, the S&P 500 index volatility stands at 13%, while WTI oil futures stand at 23%. Even stocks traditionally considered volatile in the traditional market, such as Nvidia and Unity Software, currently exhibit volatility of 72% and 59%, respectively. Volatility examples in Bitcoin include a 10% correction on March 19, reaching a low of $60,795, followed by a 12% gain on March 20. This unforeseen price swing resulted in $375 million of forced liquidations in BTC futures contracts over two days. While this movement may not directly impact holders, it certainly influences the trajectory of the bull run and, more significantly, Bitcoin’s risk perception by the broader market. The Bitcoin futures market, like any derivatives instrument, is a double-edged sword: It enables leveraged bullish and bearish bets. While entities aggressively shorting BTC futures may seem detrimental to the spot Bitcoin price, ultimately, the derivatives trade must be settled, either through buying back the contract or forced liquidation. Consequently, if Bitcoin’s price was suppressed by investors using leveraged shorts, one should anticipate the movement to eventually reverse, leading to short-term buying pressure. This partly explains why high futures open interest is linked to increased volatility.

Are Bitcoin futures behind the apparent BTC price “manipulation”?

Some analysts attribute the added volatility to excessive leverage, while others simply attribute it to “manipulation.”

X user Amit Kukreja, for instance, alleged that market makers have been pursuing leveraged longs and shorts. He claimed that stocks directly related to the sector, such as the miner CleanSpark, gained 7% on the day Bitcoin’s price crashed to $68,000. While suppositions can be made, it is impossible to ascertain the rationale behind each market participant’s intentions. To determine whether Bitcoin futures contracts have been used to exert negative pressure on BTC’s price, one should analyze the monthly contracts premium. These are the preferred instruments of professional traders due to the absence of a funding rate. To compensate for the extended settlement period, sellers typically demand a 5% to 10% premium relative to spot markets.

The BTC futures premium has maintained levels above 16% for the past three weeks, which is typical of bullish markets. Furthermore, the indicator has not significantly declined even after Bitcoin’s price fell by 17.6% between March 14 and March 20. If anything, the demand for leverage on Bitcoin’s futures appears to be more heavily concentrated on the buy side. Conversely, if the Bitcoin price continues to downtrend, those leveraged buyers might face forced liquidation, leading to drastic consequences given the $36 billion open interest.