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Bitcoin’s volatility is expected when USD 328 million BTC derivatives expire on Friday

May 29, 2020

CME’s Bitcoin (BTC) futures and options markets will mature this Friday and traders will watch how spot prices will react to this event. The contracts expire every two months According to market analysts, they have a negative impact on the price of BTC in the cash markets. Recent data from Cointelegraph and Arcane Research have shown a 2.3% decrease before CME expires.

Although some investors claim that the manipulation could be behind the drop in prices before the CME contracts expired.The average daily futures volume was around $ 380 million.

Most importantly, the instrument is paid for in cash, which means that no Bitcoin changes hands. This raises the question of whether investors should be concerned about Bitcoin’s price performance If so, which indicators can be used on May 29 to predict possible price fluctuations?

Investors have to look beyond the volume

Bitcoin’s volatility is expected when USD 328 million BTC derivatives expire on FridayBitcoin’s volatility is expected when USD 328 million BTC derivatives expire on Friday

Open interest is actually the best way to understand the actual positions of professional investorsbecause it measures the total number of contracts that market participants have.

An investor could have bought $ 50 million in futures and sold the entire position a few days later.This USD 100 million trading volume is currently not a market exposure and should therefore be rejected.

Open interest in Bitcoin Futures – USD. Source: Skew

Based on the graph above, CME’s open interest in Bitcoin futures rose from just $ 130 million at the end of March to $ 386 million this month.This is much more important than the 50% growth of Bitmex and OKEx.

Furthermore, It should be noted that there is no way of knowing whether the numbers for an unregulated place are inflatedEspecially when little or no KYC is involved.

I have watched closely what is happening in the options markets.

Option markets are a completely different derivative contract. There are endless strategies that traders use. In the simplest case, the buyer of a call option can buy Bitcoin at a specified price at a specified time.

As Cointelegraph recently reported, open interest among institutional investors in CME’s Bitcoin options increased by 1000%.

Open interest in Bitcoin CME futures. Source: Skew

The total open interest in options expiring on May 29 is currently 32,000 BTC, although only 19,000 BTC are being offered at around $ 7,500 and $ 10,500., which is just over $ 170 million.

Strangely enough At CME, the open interest for this Friday consists almost entirely of call options (bullish). The same pattern can be seen in LedgerX, another regulated place for institutional traders.

Measure the potential impact of expiring contracts

Undoubtedly, such a large open interest in futures and options will almost certainly result in a large arm wrestling between buyers (long term) and sellers (short term).The problem is that there is no way of knowing exactly how much of these derivatives are used solely for hedging.

An investor who owns 1,000 BTC may have recently been concerned about the halving of Bitcoin or the possibility of a price drop due to the fall in the hashrate.While selling your stake is an option, another strategy is to sell a $ 7,000 put option.

In this way, the investor can receive an advance payment.Therefore, it buys more cash as long as BTC closes above $ 5,000 on May 29th.

The same problem occurs on the futures market. For each operation, there must be a buyer (long-term) and a seller of the same size (short-term), regardless of whether the exchange is BitMEX, CME, OKEx, Binance or LedgerX.

The only catch is that there is no way to tell whether the short seller has an equally long position on the spot market or elsewhere in futures.

Futures contracts can be extended

In order to better assess the potential impact of the upcoming process, operators should monitor CME’s open interest in the May contract. Investors have generally expanded their position in the past few weeks.

To take a long-term position, you need to buy the June contract and sell the May contract, thereby reducing the open interest of the short-term contract. This differs from the open-ended contracts, which make up the largest part of the volume of BitMEX and OKEx.

If these investors choose not to extend their positions, this would likely increase the likelihood of further volatility during the term.

Open interest in Bitcoin futures contracts (5 BTC each). Source: CME

The latest CME data shows open positions of 3,473 ($ 158 million) contracts for May, with each contract representing 5 BTC, representing an amount of $ 158 million.

Investors should take this figure into account as the average daily volume of CME in a single day is rarely more than $ 400 million.

A significant change in open interest could lead to more intensive movements by investors.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trade movement involves risks. You have to do your own research when making a decision.

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