The increasing need for leverage among traders may be fostering the ideal environment for cascading liquidations.
On March 11, Bitcoin reached a record high of $72,000, indicating a 9.5% rise in the previous week.
There has been a lot of volatility in the surge, as evidenced by the 4.8% intraday increase to $70,055 on March 8 and the 5.9% decline to $65,935.
BTC bulls are therefore hesitant to celebrate this new all-time high, especially in light of the spike in leverage demand via BTC futures contracts.
The $35.8 billion in open interest in Bitcoin futures has drawn the attention of analysts, who note that traders frequently depend too heavily on leveraged bets.
Not to be overlooked is the fact that the Chicago Mercantile Exchange (CME) currently owns a larger portion of Bitcoin futures than more established cryptocurrency exchanges like Binance, Bybit, and OKX.
This was not the case, though, when open interest in Bitcoin futures peaked in November 2021 at a price of about $69,000. In the 30 days that followed, BTC saw a loss of 31.5%.
The Bitcoin open interest is still 27% behind its peak from October 2022 when represented in BTC.
However, the 495,380 BTC in open interest in futures contracts at this time is significant enough to cause sudden increases in volatility when the price of Bitcoin changes.
This was made clear on March 4, when a startling $325 million in long and short leveraged Bitcoin positions were cashed in.
Analysing the monthly contracts for Bitcoin futures is necessary to see whether the demand for leverage is mostly towards purchases.
These agreements typically trade at a marginal premium above the spot markets because sellers demand a higher price in order to delay settlement.
As is typical in financial markets, BTC futures should trade at an annualised premium of 5 to 10%, a situation known as contango.
Demand for leveraged BTC long bets appears to be increasing, as evidenced by recent statistics, when the premium broke the 10% neutral barrier four weeks ago.
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The premium is currently around 21%, which is frequently indicative of overconfidence. It recently reached at 23%, the highest level in more than 18 months.
It’s too soon to declare the current futures premium unsustainable, though, given that Bitcoin’s price has increased 40% in the last two weeks.
This is especially true given that premiums have exceeded 45% in previous bull markets.
The financing rate for perpetual contracts involving Bitcoin futures hit a record high of 2.1% per week on March 11 – a level not seen in more than 18 months.
Because these contracts closely mirror spot market values, retail traders frequently like them. However, there is a catch: a variable leverage fee called the funding rate.
To put it simply, a positive rate indicates that traders are using leverage more frequently for long positions.
“Record-high financing rates for Bitcoin futures reveal retail traders’ favoritism for these contracts, yet caution looms with variable leverage fees. Positive rates signal heightened leverage for long positions.”
Strong inflows into spot exchange-traded funds (ETFs) benefit Bitcoin bulls, and despite the skyrocketing prices, Microstrategy continues to purchase additional Bitcoin.
However, there is a strong likelihood that market makers and arbitrage desks would create some volatility to profit from those highly leveraged positions if regular traders get on board and begin flooding the market with investments in these costly perpetual contracts at $72,000.
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