Record derivatives activity boosts Bitcoin and Ethereum Prices

Highlights:

• On Feb. 22, Valkyrie launched a 2x leveraged Bitcoin futures ETF on the Nasdaq with the ticker BTFX. It aims to offer returns at twice the performance of other CME Bitcoin Futures ETFs.
• ETH’s funding rates consistently outpaced BTC’s throughout the month and reached an ATH of 6.68 bps, driven by speculation about the Ethereum ETFs expected to be approved in May.
• The yield from the low-risk cash-and-carry strategy on Bitcoin futures has risen to 14.7%. Cash-and-carry gains are fueled by traders’ willingness to pay high premiums to enter long futures contracts.

Forecast

Considering the upcoming SEC deadlines for the listing and trading of options for Bitcoin ETFs by September 2024 and spot Ethereum ETFs by May 2024, it is anticipated that the derivatives market will continue to steer the spot market through liquidation cascades in the weeks ahead. Introducing these financial products could increase volatility  and reignite speculative interest among traders and investors.

Sentiment

At the month’s end, the market entered euphoria due to derivatives activity. Rising prices have re-engaged traders, while attractive cash-and-carry yields draw market makers to return, thereby boosting liquidity.

Analysis

The derivatives market for Bitcoin reached record-breaking activity levels, with futures and options open interest reaching $25.57 billion and $22.4 billion, respectively. At the same time, Ethereum’s futures OI rose to $10.49 billion, its highest since November 2021, while its options OI also hit a new high at $10.24 billion.

With the increase in derivatives trading, Bitcoin and Ethereum prices climbed sharply due to short liquidations. Between February 26 and 28, Bitcoin experienced short liquidations totaling $391.21 million, contributing to a 23.55% price increase. Ethereum witnessed a similar trend, with short liquidations of $155.28 million from February 25 to 28, resulting in a 16.47% price rise.

Furthermore, Bitcoin’s OI-weighted funding rates remained largely unchanged at approximately 1 basis point (bps). However, by the end of the month, the number had gone up to 6.08 bps. This is the highest rate observed since April 2021. Ethereum’s OI-weighted funding rates consistently surpassed Bitcoin’s and reached a new all-time high of 6.68 bps. This increase is attributed mainly to market anticipation of Ethereum ETFs, with Vaneck’s final deadline set for May 23, 2024. The widening gap between Bitcoin and Ethereum funding rates indicates a shift in trader preference toward Ethereum, likely due to the speculative interest driven by the forthcoming ETFs.

The return on the cash-and-carry approach in the Bitcoin futures market has risen to 14.7%. This indicates traders' readiness to pay significant premiums for futures contracts over spot market prices. Cash-and-carry yields represent the returns from a strategy involving the purchase of an asset and simultaneously selling a futures contract on the same asset to lock in a price difference. Since this increase, this strategy can now secure returns two to three times greater than the interest rate on short-term U.S. Treasuries, which is at 5.380% as of February 29th.