Institutional investor demand for Bitcoin (BTC) became evident on November 10, as Chicago Mercantile Exchange (CME) Bitcoin futures flipped the BTC futures market size on Binance. According to BTC derivatives indicators, these investors are very confident in the possibility of Bitcoin surpassing $40,000 in the near term.
CME’s current Bitcoin futures open interest is $4.35 billion, the highest since November 2021, when Bitcoin hit an all-time high of $69,000. This clearly indicates increased interest. But is it enough to justify further price increases?
CME’s remarkable growth and Bitcoin ETF speculation scene
The 125% surge in CME’s BTC futures open interest since mid-October of $1.93 billion is undoubtedly related to expectations of the approval of a spot Bitcoin exchange-traded fund (ETF). However, it is important to note that there is no direct correlation between these movements and the actions of market makers or issuers. Cryptocurrency analyst JJcycles raised this hypothesis in a social media post on November 26.
What happens when CME (a US institution) initiates a spot hedge purchase? #Bitcoin Could ETF approval be imminent?
Open interest on CME has definitely spiked over the past few weeks.
— JJcycles (@JJcycles) November 26, 2023
To avoid the high costs associated with futures contracts, institutional investors have a variety of options. For example, you can choose CME Bitcoin options, which require less capital and provide similar leveraged long-term exposure. Additionally, regulated ETF and exchange-traded note (ETN) trading in regions such as Canada, Brazil, and Europe provides an alternative.
It seems a bit naive to believe that the world’s largest asset managers will take risky gambles using derivatives contracts, a decision that is up to the U.S. Securities and Exchange Commission and not expected until mid-January. However, the undeniable increase in CME Bitcoin futures open interest is clear evidence that institutional investors are interested in cryptocurrencies.
It may seem naive to think that the world’s largest asset managers will take significant risks with derivatives contracts following the SEC’s decision, which is not expected until mid-January. However, the undeniable increase in CME Bitcoin futures open interest highlights the growing interest of institutional investors in the cryptocurrency market.
On November 28th, CME Bitcoin futures showed extreme optimism.
While Bitcoin futures activity on CME has been steadily increasing, the most notable development has been the surge in the contract’s annual premium (base rate). 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 limited to cryptocurrency derivatives.
On November 28, the annual premium for CME Bitcoin futures surged from 15% to 34%, eventually stabilizing at 23% by the end of the day. A base rate exceeding 20% signals significant optimism, suggesting that buyers are willing to pay a significant premium to establish leveraged long positions. The current indicator is 14%, indicating that what caused the unusual movement is no longer a factor.
It is worth noting that the price of Bitcoin rose from $37,100 to $38,200 in an 8-hour period on November 28th. However, since the arbitrage between the two occurs in milliseconds, it is difficult to determine whether this surge was driven by the spot market or the futures contract. Instead of obsessing over intraday price movements, traders should look to BTC options market data to spot growing interest from institutional investors.
Related: Why Is Crypto Market Down Today?
When traders anticipate a decline in the price of Bitcoin, the delta skew metric is expected to exceed 7%, while periods of excitement typically result in a -7% skew.
Over the past month, the 30-day BTC options 25% delta skew has consistently remained below the -7% threshold and was close to -10% on November 28th. This data supports the bullish sentiment of institutional investors using CME Bitcoin futures. Doubts about the theory that whales are accumulating assets ahead of potential spot ETF approval. By their very nature, derivatives indicators do not indicate excessive short-term optimism.
If whales and market makers were 90% confident of SEC approval, in line with Bloomberg’s ETF analysts’ expectations, BTC options delta skewness would be much lower.
Nonetheless, with the Bitcoin price hovering near $38,000, the bulls are likely to continue challenging resistance levels as long as hopes for spot ETF approval remain the driving force.
This article is written for general information purposes and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.