Topic: Futures open interest might hint at market top... (Read 383 times)

This post looks like a predictive picture of the development of bitcoin.

I completely agree with this information, because this can be a source of reference for me to analyze crypto developments in the future.

This information is very important to underline, because as an investor when to buy and when to sell. predicting wrong can result in big losses.

So I guess this thread is concluded pretty much. What I predicted pretty much happened.

For most of April and May the funding rate was mostly flat, then when we started to head towards $40K, the May and June futures started to trade with no premium. Then as we broke $40K, they started to trade at a discount.

Then what happened is exactly what I predicted. Everybody that did cash and carry would close the trade. They closed their short and had to dump their BTC spot holdings which led to this massive crash. Hence the huge crash and huge OI decline by 30%.

So there is a good chance that $65K might of been the top for this cycle. Hard to say, maybe 50% sure.

Thanks for the update. Prior to following the thread, I didn't know open interest can be used as a metric to analyse market activity. But thanks to you, I know that now. Judging from the recent market movement, I'd say it's true that majority of the new investors opted for cash and carry trade and are taking advantage of the premiums that came with their purchase. However, I think this is just temporary as they could buy back later on and ride it back to all time high. I don't know much but my intuition is telling me that the top isn't in yet. Right now, the price is falling along with the open interest (which is down ~10%  in last 24hrs). If these continues, I believe we're retesting $40k.

Sounds like a good theory to me, market will tend to over react like a car braking too hard with worn shocks it will easily cause an over reaction and we run over the top of what would normally curb prices in volume resistance and support.  This effect scares market participants even outside this futures market into ordinary users and holders and we develop a trend that requires greater limits to arrest the fall.   200 day average might be such an area of very large acknowledged trend, the MA is still rising and this remains a positive market still on wider time frames.  35k would seem to be an overreaction in this month anyway, it can happen but also I expect us to control this selling and return upwards sooner rather then later; a short seller is a future buyer.
  Closing daily bar end of Feb is 45.3k and Im watching that as quite critical as we have broken a range true for some months, regaining that would mean alot.

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.

Providing an update because I see some divergence in the funding and price. Looking at,
https://www.bybt.com/BitcoinOpenInterest

It seems that price is going up, while open interest is going down. Also the funding is flat and sometimes negative.

What will soon happen is those that are short perps, will not want to lose money and they will either close their short perps by buying back the short and selling spot. Or they will just move into the futures months. However right now the June 2021 futures is only 3.5% so if people move from perps to futures, eventually the premium will disappear.

If the premium disappears people who are short futures will eventually close and sell spot. And we might see a huge dump where people are closing high leverage short positions by buying on derivatives and selling spot.

Interesting conflict between old and new trading in Bitcoin, all hours global vs the main market contract action.    I need to understand this better but Im not surprised strange things are possible, while QE is ongoing its going to keep price volatility occurring I guess

Im not seeing a top just yet but its worth putting a stick in the sand to see which way the tide is going.   I definitely think theres plenty of room for doubt still, the simplest take might be when people purely look forward and forget we can go down also; it would still be a very positive year whatever happens.

on 4hr bars Im just observing 59k area as somewhere its critical later on to hold.   We did go back to the weekly average but it regained that quickly.

Providing an update. Basically the OI is hitting record highs again and the December futures for BTC has a 25% premium. Can you belive that? Basically by doing the cash and carry trade you can make 25% risk free by just waiting 8 months.

Author Hayes has published a great article about all this "cash and carry" going on with the premiums. If you got 28 minutes you can read his article at,
https://cryptohayes.medium.com/all-aboard-4d50435190d6

He also provides examples and some risks on what you can encounter.

I think most of the short futures and short perps these days are people who are doing these cash and carry trades.

Well alot has changed since my update on March 5th. The OI was only $15B then and now it is close to $23.5B, so an increase of $8.5B in such a small amount of time. Basically a matter of days.

The lowest premium for March futures was like 0.7% and now its 2.1% for ETH March futures. And the premiums are also high for June and September futures. Seems there is lots of tether prints which are going to these futures exchanges such as FTX a few hours ago and there are people who are milking the premium again.

So its a cycle like before. The market rallies, funding rates increase, futures increases, OI rises, people deposit USD and they buy spot ETH or BTC and at the same time open a short position. Right now for Sept futures they can get 15% risk free profit. I think there is another exchange with a Dec futures for BTC and the premium is crazy high at 21%.

So if you got a million dollars, you can earn $210,000 doing absolutely nothing almost risk-free for less than a year. Crazy times.

So going to provide an update. The OI is close to $15B which was the low last week. However there are a few things to look out for.

First is the GBTC premium is gone and there is a large discount. Basically -10%. So what this means is that there will be no more GBTC purchases until the premium comes back. Most likely this is because there is a Canadian Bitcoin ETF and OBTC funds which have lower rates than GBTC 2%'s. Something to keep an eye for.

Second is that the March futures are fairly low, around 0.5-0.7% and these were at 6% when I made this thread. So what is going to happen, people are going to be happy with taking the 5.5% profits and they are going to close their futures shorts and sell their spot holdings. So when the rate goes lower, people will start to sell their spot holdings. This wil be observed if we are trading sideways AND the open interest is being decreased.

So its hard to tell but if there are massive billion here and billion here of spot ETH and BTC being sold to close the hedge while there is no derivative buyers then we might be in for a red month of March.

This sounds like it will attract gamblers and bankrupt most...

GoldRush 2021 yeeehaw,!!!

2 things to note. The cash and carry premium is still high but not as high as before. Currently the June futures are 6% while a week ago they were closer to 11%. Here is the evidence I can see how people are milking the premium.

Look at the unrealized loses for the Bitfinex leadership board, currently we see over > $100,000,000 in loses from 2 individuals most likely some large whales. So obviously they are long at a loss. I think they somehow managed to secure ultra low USD funding rates on Bitfinex and they bought spot BTC while selling the futures to collect the premium. Watch these positions and when they start to realize profit means they are closing the arbitrage, however not yet.

look at the GBTC premium, it’s negative for the first time in a long while? What does it mean? Well it means that someone did the cash and carry on the GBTC premium. 6 months ago they bought GBTC which means they had to buy actual BTC from spot market and at the same time they entered a BTC short. So now they covered the short while selling their position on GBTC which resulted in the negative premium. So by covering they gave some BTC buying pressure but since the premium is gone there will be most likely no more BTC being removed from market by GBTC because there is no more premium.

There is no catch.

Only catch can be that you will need to leave some collateral on your futures broker since you need to provide margin. Leaving any crypto on any exchange always poses some risk. Whether your account gets hacked or the exchange might get hacked. These days exchanges getting hacked is rare however.

Since BTC and ETH are hitting ATH almost everyday you need to provide sufficient margin. You can't use 10x leverage by shorting 1 BTC worth and only keeping 0.10 BTC on the exchange because a small move overnight might liquidate your account. So you should leave enough so your leverage is small like 1-3x.

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?

Yesterday we had around $1B in liquidations, then we quickly rebounded and open interest hit a new high today. Then we got another $800M tether print. And about an hour ago there was $600M worth of Coinbase outflows. Seems like some institution or Saylor bought a bunch when it dipped yesterday. Probably around $55K or so.

So in my opinion as long as the open interest keeps climbing, tether prints, large monthly premiums, coinbase outflows, supply side liquidity crisis, etc. We are far from the ATH. So will keep monitoring in the mean time and see if open interest provides any hints of a top.

We are at the red band of the MVRV Z-score. Usually when the Z-score goes to 10 it means within a week or two its a market top cycle, currently we are at the lower band. To put us at the top band we would need to quickly go to like $90-$110K.

I understand that when there is interest to crypto, the price increases, and when price increases there is interest to crypto and it goes on like that in a circle for a very long time until we realize what is going on. However reality is that we are in a situation where the circle is just not breaking, it is just keep going higher and higher, and I do not think that it will be broken anytime soon neither, it looks like we are going to be fine for a while. Of course it may not be that simple for now.

Those huge companies you listed buying into bitcoin means that we may never see a crash ever again for a very long time, obviously markets crash and even stock markets which are a lot less volatile than crypto crashes time to time, but I think that could be it, just time to time once in a decade crash, otherwise just being kept higher. How? Those huge companies keep buying more and more.

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.

This is what I'm questioning. It's short term bullish, for sure, but it indicates a "fragile" bull market, because the speculative capital flowing in (and milking the premium) can flow out at any time when the conditions change, causing selling pressure, like you point out in your OP.

A more "sustainable" bull market would come with stable or only slowly rising open interest. This would indicate that the rise is not only caused by speculative "cash & carry" capital.

However, this can perhaps also not be generalized. For example, the situation is different when open interest is very low at the start of the comparison. In this case the rising open interest may be an adoption indicator, meaning "it's becoming a normally traded asset", which could be perfectly true for Bitcoin as its adoption on traditional financial markets is relatively recent. But in the current situation I think you are right that the open interest is high more due to other factors like high funding rates.

As far as I understand the mechanisms (I only recently read about perpetual future contracts) I agree. So a flattening and subsequently falling premium could be an even earlier indicator of a market top than declining open interest rates.

The way it works is

When open interest is rising and market is rising its bullish.
When open interest is decreasing and market is rising its bearish.
When open interst is rising and market is decreasing its bearish
When open interest is decreasing and market is decreasing its bullish

However this situation right now is unique due to the high funding rates. On Bybit I think the daily funding rate was >1% for the past few days. Hence its resulted in high forward futures rates for months Feb, March, June.

Even the CME March Futures is around 5% premium. Hence some fund can easily short the CME March futures, send the same amount of capital to Coinbase and long an equal amount and profit off the difference in 4 months. 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.

I like the OP's hypothesis, it sounds reasonable, and I will definitively try to follow open interest a bit to see if the theory holds true with Bitcoin.

This Investopedia article seems to indicate that declining open interest combined with a price increase definitively is viewed as a bearish sign (incoming top).

What I don't like about the Investopedia article is that they regard rising open interest rates generally as a positive and bullish sign (only exception: they see "record open interest" as a warning sign). But it could also be interpreted differently: as a only short-term bullish sign, because speculative capital is entering a market, which is more negative for the long term.

We could develop this theory a little bit further, into some kind of index. Ideally it should indicate when price movements are caused by long term adoption and not only speculative capital. For example, the following formula might make sense at a first glance:

Price delta / Open interest delta

This value becomes high in two occasions:

1) High price increase and low open interest increase, or open interest decrease.
2) Open interest decrease, stronger than a possible price decrease.

while the lowest point would be a price decrease and a high open interest decrease, which could indicate that short sellers are entering the market and price will plummet much deeper.

This formula however also always needs to be compared with the price graph, because a high value is not always bullish - when open interest begins to rise slower than price, then the values becomes higher but this indicates a nearing top. So the formula might make more sense when comparing longer timeframes.

As can be attested to by the numerous Bitmex rekt threads you'll find popping up --  bull run or not. I probably agree that a tiny liquidation price at "moderate" leverage looks attractive for the next few months. Strange that 50k actually is causing a flurry of new fomo when the new ATH didn't really but here we go.


I know that's just a sweeping statement (I definitely did invoice the hell out of people in March haha) but you're right. There's a supply squeeze already on the horizon.

Owning a cfd is not proof of ownership of the underlying asset. Coinbase and binance fiat exchanges are dojng fiat to fiat trades. You'll be deleveraged if they don't have the funds to cover you (while using leverage).

Here is the thing,

At $3K nobody was buying... everybody was selling
At $50K nobody is selling... everybody is buying

A small $500 amount can buy up to $50000 worth of BTC. Someone basically only puts in $500 into the market and the counterparty needs to buy $50000 worth of crypto to hedge. So $500 can remove up to $50000 worth of supply from the market. This is similar to how a cheap $1 call contract in the stock market represents 100 worth of shares.

Now here is the situation. If there is little bid side liquidity how will the $50000 get closed? The most the $500 investor can lose is $500, where will the other $49500 come from?

For anyone wondering why people say they couldn't predict the top last time, it's because there was a price correction just before it in 2017... I think the price did something like $17k to $12k to $20k in a month or two as I remember $18k being reported as a new top.

We still had leverage back then, it was smaller but so was the market cap... There are a lot of people doing a few times leveraged lings. Most are pointing at us going to 62k and then to 29-39k or vice versa (eg we could liquidate everything over 3x before we get there and might even go further).

A 5x long with a tiny liquidation price doesn't look too bad now.. At $3k the chance of us dropping by half was a lot higher than it is now we're at $50k and have a lot more people looking at the market.

crypto is one of the highest risk markets out there for leverage trading

Not sure if it's easier to predict the bottom, to be honest. And depending on the timeframe too. 30k still possible or 90k next? And we're talking about 3, 6 or 9 months til end of the year?

Open interest does say something though about sentiment and if we're ten times what we were just 2/3 years ago, it's impossible to ignore.

Another Bitmex flash crash of epic proportions you say? Show me the line to buy then.

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.