The price of Bitcoin is up 22.5% in March. Most notably reaching a new all-time high of $61,000 over the weekend before paring some of those gains. Meanwhile, Bitcoin futures open interest soared to a new record-high of $22.5 billion.
This is because some buyers began to use leverage. Investors are worried this could lead to large liquidations during a sell-off.
When Bitcoin peaked at $58,300 on February 21, the price plummeted 26% the following week. The price move wiped out over $4.5 billion worth of futures contracts, taking away buyers’ leverage. This was confirmed by the annualized premium on the 1-month futures contract dropping to 17%.
The open interest on BTC futures has increased 39% since then. To determine whether the market is overly-optimistic, traders are analyzing a couple of derivatives metrics.
The first is the futures premium, which measures the price gap between futures contract prices and the regular spot market.
The 1-month futures should usually trade with a 12% to 24% annualized premium. However, the Bitcoin futures basis is currently peaking at an unsustainable 60%. Signalizing excessive leverage from buyers and creating the potential for massive liquidations.
This indicator corrected after the Bitcoin price dropped from the $61,000 on March 13. A similar movement happened on Feb. 21 as BTC reached a $58,300 all-time high and crashed 22% two days later.
Additionally, the futures basis rate adjusted to a neutral 16% level. A basis level above 24% reflects high leverage usage levels from futures contract buyers.
According to CoinMarketCap, the three-largest centralized derivatives exchanges. Binance, Huobi Global, and ByBit represent more than $100 billion in combined daily trade. Binance alone is $57 billion.
Bitcoin rally to $61,000 did not cause liquidations
The Bitcoin futures open interest has been increasing since February. Indicating short-sellers are taking benefit of the futures premium instead of effectively expecting a downside.
These arbitrage positions usually do not present liquidation risks. Therefore, the current surge in open interest is a positive indicator.