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The price of Bitcoin (BTC) rose to as high as $9,620 on May 28 ahead of the CME futures market’s monthly close. Market data shows the rally of BTC — the biggest cryptocurrency by market capitalization — was primarily caused by the futures market. Historically, a futures-led rally leaves the top cryptocurrency vulnerable to a pullback.

Bitcoin rejected the $9,500 to $9,600 resistance range with strength, falling below $9,400 within a span of four hours. Analysts say the probability of a long squeeze is increasing as 74% of positions account for long contracts.

Bitcoin futures open interest rose while spot market volume fell

The most noticeable evidence that suggests the futures market was behind the uptrend of Bitcoin from $8,700 to $9,600 is the increase in the open interest of BTC contracts.

Open interest calculates the total amount of active long and short contracts held by traders on futures exchanges. On BitMEX and OKEx alone, $1.6 billion worth of Bitcoin futures contracts are currently open.

The combined open interest of BitMEX and OKEx surpasses $1.6 billion. Source: Skew

In the last four days, the open interest of BitMEX increased from $500 million to $800 million, increasing by around 60%.

Since early May, however, the spot volume of Bitcoin on Coinbase and LMAX declined from $600 million to around $150 million per day. Since May 25, the daily spot market volume remained stable in the $150 million to $180 million range.

Daily volume of the Bitcoin spot market

Daily volume of the Bitcoin spot market. Source: Skew

Despite a 10% increase in the price of Bitcoin in merely four days, the volume of the spot market barely moved. It shows the majority of the buying demand came from OKEx, BitMEX, Huobi, Binance, Bybit and Deribit over spot exchanges like Coinbase.

Why buying demand coming from the futures market is not ideal

Traders in the futures market are typically leveraged. Futures exchanges like BitMEX and Binance support maximum leverage of up to 125x. That means traders can trade Bitcoin with large amounts of borrowed capital.

When the price of Bitcoin sways in the opposite direction than the majority of positions in the futures market, it can trigger a cascade of liquidations.

Currently, the futures market is overwhelmingly dominated by long contracts. Hence, if the price of BTC sees an abrupt drop in the near-term, it increases the probability of a large short squeeze.

In the short-term, top traders consider $8,900 as a strong support level. On May 23 and 27, the $8,800 to $8,900 price range acted as support, allowing Bitcoin to rally to above $9,600.

Bitcoin has a strong support level in the $8,800 to $8,900 range

Bitcoin has a strong support level in the $8,800 to $8,900 range. Source: Satoshi Flipper

Traders remain divided on the current trend of Bitcoin because if the price continues to rise without a short squeeze, then it may set BTC up for a proper bull run.

For now, due to the high level of activity in the futures market and the rejection of Bitcoin at $9,600, traders are seemingly taking a cautious approach.

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