Demand for bitcoin (btc) from institutional investors became evident on November 10 when Chicago Mercantile Exchange (CME) bitcoin futures overtook Binance’s btc futures markets in terms of size. According to btc derivatives metrics, those investors are showing great confidence in bitcoin‘s potential to surpass the $40,000 mark in the near term.
The current CME bitcoin futures open interest sits at $4.35 billion, the highest since November 2021 when bitcoin hit its all-time high of $69,000, a clear indication of increased interest, but is it enough to justify higher price gains?
The remarkable growth of CME and spot speculation on bitcoin ETFs
The impressive 125% increase in CME btc futures open interest from $1.93 billion in mid-October is undoubtedly tied to the anticipation of the approval of a spot bitcoin ETF. However, it is important to note that there is no direct correlation between this movement and the actions of market makers or issuers. Cryptocurrency analyst JJcycles raised this hypothesis in a social media post on November 26.
What would happen if CME (US institutions) opened long positions to hedge the spot market? bitcoin?src=hash&ref_src=twsrc%5Etfw”>#bitcoin Could ETF approval be imminent?
Open interest surely increased on CME in recent weeks.
— JJcycles (@JJcycles) November 26, 2023
To avoid the high costs associated with futures contracts, institutional investors have several options. For example, they could opt for CME bitcoin options, which require less capital and offer similar leveraged long exposure. Additionally, trading in regulated ETFs and exchange-traded notes (ETNs) in regions such as Canada, Brazil and Europe offers alternatives.
It seems somewhat naive to believe that the world’s largest asset managers would take risky bets using derivative contracts in a decision that depends on the United States Securities and Exchange Commission (SEC) and is not expected until mid-January. However, the undeniable growth in CME bitcoin futures open interest is strong evidence that institutional investors are setting their sights on the cryptocurrency.
It might seem naïve to think that the world’s largest asset managers would take significant risks with derivative contracts in an SEC decision, expected in mid-January. However, the undeniable growth of CME bitcoin futures open interest underlines the growing interest of institutional investors in the cryptocurrency market.
CME bitcoin Futures Indicated Extreme Optimism on November 28
While CME bitcoin futures activity has steadily increased, the most notable development has been the increase in the annualized premium (base rate) of the contracts. In neutral markets, monthly futures contracts typically trade at a base rate of 5% to 10% to account for longer settlement times. This situation, known as contango, is not unique to cryptocurrency derivatives.
On November 28, the annualized premium for CME bitcoin futures rose from 15% to 34%, eventually stabilizing at 23% by the end of the day. A base rate above 20% indicates substantial optimism, suggesting that buyers were willing to pay a substantial premium to establish leveraged long positions. The metric currently sits at 14%, indicating that whatever caused the unusual move is no longer a factor.
It is worth noting that during that 8-hour period on November 28, the price of bitcoin rose from $37,100 to $38,200. However, it is difficult to determine whether this increase was driven by the spot market or futures contracts, as arbitrage between the two occurs in milliseconds. Instead of focusing on intraday price movements, traders should look to btc options market data for confirmation of increased interest from institutional investors.
Related: Why is the cryptocurrency market down today?
If traders anticipate a drop in bitcoin price, a delta bias metric greater than 7% is expected, while periods of enthusiasm typically result in a -7% bias.
Over the past month, the 25% delta bias of 30-day btc options has remained consistently below the -7% threshold, settling near -10% on November 28. This data supports bullish sentiment among institutional investors using CME bitcoin futures, casting doubt on the theory that whales are accumulating assets ahead of a possible approval of a spot ETF. In essence, derivatives metrics do not indicate excessive near-term optimism.
If whales and market makers were truly 90% certain about SEC approval, in line with Bloomberg ETF analysts’ expectations, btc options delta bias would likely be much lower.
However, with bitcoin price trading near $38,000, it appears that the bulls will continue to challenge resistance levels as long as hope for a spot ETF approval remains a driving force.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
