Topic: Futures open interest might hint at market top... (Read 307 times)

This is not investment advice. I am not a financial advisor. I am just posting this for entertainment purposes.
Please POST relative information to the topic. Any low quality posts will be deleted

Where will Bitcoin top? We just broke $50K? So is $100K next. What about $250K. Honestly its impossible to predict the top. Easier honestly to predict when a bottom will happen rather than a top.

So what can you do to sell as close to the top as possible? I think we can analyze the bitcoin futures open interest.

Currently this is the open interest for BTC futures.
https://www.bybt.com/BitcoinOpenInterest

As you can see, in the last 12 months we went from $3.5B to $18.75B. This is crazy since back in 2018 the largest open interest was maybe $1.5B or so.

Why is the open interest so high? Well I think part of it is people going full leverage to make the most money possible. Another part can be people capturing the premium.

Currently its expensive to borrow fiat to go long on bitcoin. Most exchanges have run out of available USD funds to buy crypto and others have crazy funding rates. So hence why there is always a positive funding on BTC and ETH, usually 0.25% per day lately. Hence if you look at the June futures for BTC, they are currently at 11%.

So I think alot of the money that is entering crypto now, is mostly cash and carry trades. Someone prints $100,000,000 USDT and they invest that to capture the 11% premium within 4 months. Which is about 33% APR. Where else can you get that kind of interest.

Here is how its done.

Someone sends $100,000,000 (or any amount) to a crypto exchange.
They buy $100,000,000 worth of ETH or BTC on spot and at the same time they sell $110,000,000 contracts on the June futures exchange.
Wait 4 months. Sell the spot holding and get back $100,000,000 while they buy the 111,000,000 contracts position and they will net $11,000,000 in profit.


The reason this works is because currently the markets are balanced, there is lots of liquidity on both markets. The trouble might come when the premium dries up.

Say next month or in 2 months the 11% premium goes down to 1%. Most likely the arbitrator will want to close the position and get their 10% early rather than wait longer to get another 1%.

So what happens is they need to unload $100,000,000 worth on spot and buy $110,000,000 on futures.  The issue here is, eventually the bid side on the spot market might not be able to handle all this selling pressure. The futures exchange has 100x leverage so it can usually handle this type of volume. But if there are billions of these positions that are getting unwinded who will be able to close them?

Also consider this.

Say you short 1 BTC at $50,000 by "cash and carry" method. And price is $25,000 when you want to close. You will gain another 1 BTC in profit. So to close the trade you will need to sell 2 BTC to get back your $50,000. And as the price of BTC goes lower and lower that means more and more BTC supply needs to hit the bid side to close the trade.

Eventually what might happen is similar to what happened with Bitmex back in March 2020. The market was leverage long and there was billion of long liquidations and nobody to cover them. Hence why we got that flash crash.

There is alot of money entering crypto. However at these prices how do we know that this money is to actually spot long BTC and not do these "cash and carry" trades? We see these huge tether prints. How do we know its someone who is buying for long term cold storage spot hold? Or someone just milking the premium?

Leverage is very powerful. Especially 100x. Someone with basically $500 cash can long about 1 BTC worth using 100x leverage. Hence someone on the other side of that trade can arbitrage that 1 BTC worth, by actually buying $50000 without leverage on spot. Hence there is a similar type of squeeze going on here to a gamma squeeze. The issue will be when these bids disappear. Because that $50000 futures position will eventually need to be closed by someone selling $50000 worth of spot and if the money isn't there then there will be a long squeeze.

TL:DR Wait until the open interest starts to decline and no premium on the future contracts. Then most likely some large crash might be coming.

Providing another update!

So the purpose of this thread was to prove my theory. Will the futures predict a market top?

So right now the May and June Bitcoin futures are trading at a discount. A few months prior the June futures was trading at 10-15%. Which means tons of people did a cash and carry trade. They bought spot BTC and now they are closing their cash and carry trade. So they are dumping BTC while they are covering their future short and profiting the 10-15% premium.

So I am going to be watching the monthly futures closely and what we will see is the open interest go down. And this will lead to selling pressure. So if price is trading sideways or upwards AND open interest is heading downwards, it means there is massive sell pressure from cash and carry trades. So we might easily head into the $35K's area before heading back up to ATH.

This cash and carry premium arb seems like a no-brainer. I have BTC futures access at my broker, and an exchange account. Hypothetically speaking, what is the catch?

Yes its sort of a cycle that eventually will get disrupted somehow.

As price is rising, people are wanting to long futures using leverage, then funding rates increase, so premiums increase for the monthly contracts, non-traders see the risk free premium so they do the "cash and carry" technique, supply decreases on exchanges as a result, so price keeps rising again and cycle repeats.

Lately there seems to be major supply issues with bitcoin. Not only are these cash and carry people removing supply but GBTC is still buying, Microstrategy, Canadian ETF buying physical BTCs, etc. And traders who own BTC don't want to sell because why sell at $55K when you can sell at $100K.

When open interest is rising and market is rising its bullish.

My concern is what will happen when these high funding rates stop which will make the forward futures rates premiums decrease or disappear. These positions will need to be closed. Hence there will be unwinding and spot selling.[...] Question is... when will this happen. Stock market has been rallying for almost a year with rising volumes and call option trades and there is no stock market peak in sight. So who knows how long this will go on for.