On November 10, demand for Bitcoin (BTC) from institutional investors became apparent as Chicago Mercantile Exchange (CME) Bitcoin futures disrupted Binance’s BTC futures market in scale. According to BTC derivative indicators, these investors are expressing strong confidence in Bitcoin’s potential to surpass the $40,000 mark in the short term.
CME’s Bitcoin futures open interest currently stands at $4.35 billion, the highest level since Bitcoin hit an all-time high of $69,000 in November 2021, a clear indication of increased interest, but is it enough to prove Is further price increase justified?
CME’s Significant Growth and Spot Bitcoin ETF Hype
CME’s BTC futures open interest surged 125% from $1.93 billion in mid-October, no doubt related to expectations of the approval of a spot Bitcoin ETF. However, it is worth noting that there is no direct correlation between this movement and the actions of market makers or issuers. Cryptocurrency analyst JJcycles proposed this hypothesis in a social media post on November 26.
What happens if CME (a US institution) opens a long position to hedge the spot? #bitcoin Which ETFs are about to be approved?
Open interest on CME has certainly surged over the past few weeks.
— JJcycles (@JJcycles) November 26, 2023
To avoid the high costs associated with futures contracts, institutional investors have several options. For example, they can choose the CME Bitcoin option, which requires less capital and offers similar leverage to long positions. In addition, regulated ETF and exchange-traded note (ETN) trading in regions such as Canada, Brazil and Europe offer alternatives.
It seems naive to believe that the world’s largest asset managers will use derivatives contracts to make risky bets, a decision that depends on the U.S. Securities and Exchange Commission (SEC), which is not expected to be made until mid-January. However, there is no denying that the growth of open interest in CME Bitcoin futures is strong evidence that institutional investors are setting their sights on cryptocurrencies.
It seems naive to think that the world’s largest asset managers will take on significant risk in derivatives contracts in light of the U.S. Securities and Exchange Commission’s (SEC) decision, expected only in mid-January. However, there is no denying that the growth of CME Bitcoin futures open interest highlights the growing interest of institutional investors in the cryptocurrency market.
On November 28, CME’s Bitcoin futures showed extremely optimistic signals
While CME Group’s Bitcoin futures activity has been growing steadily, the most noteworthy development has been the spike in the contract’s annualized premium (basis). In neutral markets, monthly futures contracts typically trade at a basis of 5% to 10% to allow for longer settlement times. This situation, known as contango, is not unique to cryptocurrency derivatives.
On November 28, the annualized premium of CME Bitcoin futures soared from 15% to 34%, and finally stabilized at 23%. A basis above 20% signals high investor optimism, indicating that buyers are willing to pay a substantial premium to enter a leveraged long position. Currently, the indicator stands at 14%, showing that factors causing unusual volatility are no longer factors.
It is worth noting that within 8 hours on November 28, the price of Bitcoin increased from $37,100 to $38,200. However, determining whether this surge was driven by the spot market or futures contracts is challenging because arbitrage between the two occurs within milliseconds. Instead of focusing on intraday price action, traders should focus on Bitcoin options market data for confirmation of increased institutional investor interest.
Related: Why Are Cryptocurrency Markets Down Today?
If traders expect Bitcoin prices to fall, the Delta deviation indicator is expected to exceed 7%, while periods of excitement typically result in -7% deviation.
The 30-day BTC option 25% delta deviation has remained below the -7% threshold over the past month, approaching -10% on November 28. The data supports bullish sentiment among institutional investors using CME Bitcoin futures, casting doubt on the theory that whales are accumulating assets ahead of potential spot ETF approval. In essence, derivatives indicators do not indicate over-optimism in the short term.
If whales and market makers are truly 90% sure of SEC approval, in line with Bloomberg ETF analysts’ expectations, then BTC option delta bias could be much lower.
Still, with Bitcoin approaching $38,000, bulls appear set to continue challenging resistance as long as hopes of spot ETF approval remain a driving force.
This article is for general information purposes only and is not intended to be, and should not be construed 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.
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