Over the past seven days, Bitcoin (BTC) has surged a whopping 14.5%, hitting a 20-month high of $41,130 by December 4. Traders and analysts were left speculating, especially due to the liquidation of $100 million worth of shorts. (Bearish) Bitcoin futures are made within just 24 hours. However, a closer look at BTC derivatives data tells a different story that highlights spot market activity.
BTC liquidation map
Enough shorts to go for $45,000-$46,000. pic.twitter.com/7O2zYD4j8Q
— Nick Algo (@nik_algo) December 4, 2023
Impact of recent Bitcoin futures market liquidation
Although the Chicago Mercantile Exchange (CME) trades USD-settled contracts for Bitcoin futures, no actual Bitcoin is traded, but these futures markets undoubtedly play a significant role in shaping spot prices. The sheer size of Bitcoin futures, with a total outstanding amount of $20 billion, highlights the keen interest from professional investors.
During the same seven-day period, $200 million worth of BTC futures shorts were liquidated, representing just 1% of total open contracts. This figure pales in comparison to the $190 billion in trading volume over the same period.
Even if we only focused on the CME, which is known to have the potential for volume inflation, its daily trading volume of $2.67 billion would have easily absorbed $100 million in 24-hour clearing. This has left investors wondering whether the recent Bitcoin rally can be attributed to the targeting of a few whales in the futures market.
$BTC Next possible plan
A quick wick to 42k-42.5k to hunt the BSL of the Shorts, and a quick flushout of the Longs & we will see $BTC Fullback to 39k-38.5k
A retracement to 39k-38.5k would be a good buying opportunity for the last leg up to 45k-47k before ETF approval pic.twitter.com/yc7k0hOBpZ
— VELLa Crypto (@VellaCryptoX) December 4, 2023
You can use tape reading techniques to try to measure the degree of liquidation at different price levels. However, this approach does not take into account whether whales and market makers are adequately hedged or have the ability to deposit additional margin.
Despite Bitcoin surging to its highest in 20 months, the futures and options markets appear relatively depressed. In fact, three key pieces of evidence suggest that there is no compelling reason to expect a cascade of short contract liquidations if Bitcoin exceeds the $43,500 threshold.
Bitcoin Derivatives Show No Signs of Excessive Optimism
Perpetual contracts, also known as inverse swaps, typically contain an implied interest rate that is recalculated every eight hours. A positive funding ratio signals an increased need for leverage on long positions, while a negative ratio signals the need for additional leverage on short positions.
Data shows a peak of 0.04% per 8 hours on December 4, but this level of 0.9% per week appears to be short-lived. The current weekly rate of 0.4% is putting minimal pressure on leveraged long positions, indicating a lack of urgency among retail traders. Conversely, there is no sign of exhaustion among the bears.
To assess whether Bitcoin perpetual swaps represent an anomaly, we turn our attention to the BTC monthly futures contract, a favorite of professional traders due to its fixed funding rates. Typically, these contracts trade at a premium of 5-10% to account for extended payment periods.
Related: How to Prepare for the Next Crypto Bull Market – 5 Simple Steps
According to BTC fixed-term futures contract data, the highest premium was 12% on December 4 and currently sits at 11%. This level remains reasonable, especially considering the prevailing bullish momentum. The historic rally in 2021 saw premiums surge by more than 30%, further challenging the notion that the rally was primarily driven by Bitcoin derivatives.
Ultimately, with the price of Bitcoin surging 14.5% in just 7 days and only $200 million worth of short-term futures contracts liquidated, it was unclear whether the bears used conservative leverage or diligently increased their margin deposits to protect their positions. A question arises.
Considering the funding rate and futures reference rate, there is no clear indication that anything above $43,000 will result in significant stock losses.
Essentially, the recent surge supports spot market accumulation and looks for a decline in the supply of coins available on exchanges. According to Coinglass, over the past week the exchange has recorded a net outflow of 8,275 BTC.
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.