Bitcoin futures open interest jumps by $1B: Manipulation or hedge?

With open interest rising sharply and Bitcoin hitting $27,200, some observers are wondering if the price of the cryptocurrency is being controlled.


On September 18, a $1 billion spike in open interest on derivatives exchanges, valued at $27,102, caused investors to wonder if whales were building up their holdings ahead of the release of Binance’s court documents.

A deeper examination of derivatives indicators, however, paints a more complex picture because there were no overt indications of high buying demand in the financing rate.

The US Securities and Exchange Commission, which had charged Binance with non-cooperation despite having previously consented to a consent order pertaining to unregistered securities operations and other claims, was given the authority to decide whether to unseal these papers.

Open interest shot up to $12.1 billion at the same time that the price of Bitcoin surged by 3.4% to $27,430, its highest level in more than two weeks.

But investors quickly discovered that the documents that had been unsealed had very little specific information, save for a remark made by Binance. US auditor about the difficulties in guaranteeing full collateralization.

Later on in the day, Federal Judge Zia Faruqui turned down the SEC’s request to see the technological architecture of and provide more details. Even still, the judge ruled that Binance.US had to provide further information regarding its custody plan, raising questions about whether Binance International actually has final authority over these assets.

By the end of September 18, the price of Bitcoin had declined 2.4% to $26,770, and its open interest had decreased to $11.3 billion. This drop suggested that the organizations responsible for the spike in open interest had lost interest in holding their positions.

The court’s decisions probably displeased these whales, or else the price action might not have gone as planned. Either way, in less than a day, eighty percent of the increase in open interest vanished.

Buyers and sellers of futures are matched at all times

It is reasonable to believe that bullish emotion was the primary driver of the demand for leverage given that the price of Bitcoin rose in tandem with the increase in open interest and then declined as 80% of the contracts were closed. But for a number of reasons, it doesn’t seem appropriate to attribute cause and effect to Binance’s court decisions alone.

First off, considering that the SEC was the one who originally asked for the documents’ release, nobody expected the previously secret records to be favorable to Binance or its CEO, Changpeng “CZ” Zhao. Furthermore, over this time frame, there was little variation in the funding rate of the Bitcoin futures contract, which measures the disparities between long and short holdings.

If there had been an unanticipated $1 billion open interest surge in demand, mostly from desperate purchasers, it makes sense to believe that the funding rate would have risen over 0.01%. On September 19, on the other hand, the complete opposite happened: while the financing rate dropped to zero, Bitcoin’s open interest increased to $11.7 billion.

During this second phase of open interest growth, Bitcoin’s price has rallied above $27,200, making it more and more clear that, regardless of the underlying reasons, the price pressure is generally upward. Even though the precise cause of this shift may never be known, several trading patterns may provide insight.

Market makers’ hedging may have been to blame for the OI increase.

The involvement of market makers in carrying out buy orders on behalf of significant clients is one logical explanation. This would explain the early fervor that drove up the price of Bitcoin futures and the spot market. The market maker becomes completely hedged following the initial spike, which removes the need for more purchases and causes a price correction.

Since the market maker has to buy spot Bitcoin and dump the BTC futures contracts, there is no effect on the price of Bitcoin during the second part of the trade. This causes a decrease in open interest and can let down participants who were hoping for more buying fervor.

Before prematurely declaring any “Bart” formation to be a manipulation, it is advisable to thoroughly examine the BTC futures funding rate and learn more about how arbitrage desks operate. Thus, a surge in open interest does not always indicate a purchasing frenzy, as it did on September 18, when there was not an abnormal desire for leveraged long positions.

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