Speculative risk in derivatives markets continues to weigh on the Bitcoin (BTC) market despite the recent drop. A minimal decline in futures open interest and the divergence of biases present on Bitfinex, Kraken, FTX and Deribit suggest that a second wave of sell-offs is on the cards in the event of high volatility.
Bitcoin approaches its former ATH
Bitcoin (BTC) price invalidates the $30k-$28k zone and approaches the symbolic $20k level (former ATH), leading to a drop in the overall network profitability and significant losses in the spot and derivatives markets .
This drop in price is accompanied by an increase in speculative risk in the derivatives markets, auguring a potential series of further cascading liquidations .
Figure 1: Daily price of Bitcoin (BTC)
This week, we will closely assess:
- the evolution of speculative risk in recent weeks;
- the extent of loss taking on the spot markets;
- market entry into a historically attractive price zone .
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Heavy speculation deep in the bear market
Let’s start with current activity in the financial markets, where we can see many signs of increased speculative activity.
First, Bitcoin futures open interest (OI), measured in BTC, has been steadily rising since early May , rising from 373,000 BTC to an ATH of 486,000 BTC on Monday evening.
Since losing the $30,000 level last Wednesday, OI has negatively correlated with the price of BTC and is up over 11%, signaling sizeable speculative interest .
The cascade of liquidations caused during the last 24 hours was not enough to purge the excess leverage present on the derivatives markets.
Figure 2: Bitcoin Futures Open Interest
Additionally, when the price of BTC reached $24,000, a divergence in the futures funding rate emerged: while Kraken, Deribit, FTX, and BitMex adopted a short bias, Bitfinex suddenly became very bullish.
This divergence signals a conflict of interest of bullish and bearish speculators that can only be resolved by either de- escalating their position (returning to sanity) or liquidating them (purging greed).
The average financing rate is currently -0.012%, showing a global appetite for short positions.
Figure 3: Futures Funding Rates
Meanwhile, futures trading volume more than tripled from 1.33Mn BTC to 4.98Mn BTC in less than 24 hours.
This increase in effervescence caused by the fall in the spot price on the derivatives markets, causes a feedback loop between
- liquidations of long positions;
- forced stop losses at the close;
- selling pressure from short positions.
Largely exceeding the volumes recorded during the Terra/LUNA crash, this measure testifies to the paramount influence of the derivatives markets on the recent drop.
Figure 4: Bitcoin futures volume
Resulting from the debacle caused by the factors observed above, a series of liquidations on the derivatives markets caused more than 300 million dollars of losses in 24 hours.
Confirming that this drop is more influenced by derivatives markets than a month ago, this observation does not rule out the possibility of a deeper drop over the next few days .
Figure 5: Bitcoin futures long liquidations
Indeed, the still high OI, the long positions on Bitfinex, as well as the growing margin call risks of companies such as MicroStrategy and Celsius point to a possible bloodbath to come if conditions deteriorate further.
Heavy losses on the spot markets
Added to these observations is a painful series of losses made on the hourly scale. Much higher than the losses recorded on May 10 and 13 (~$150Mn), yesterday’s drop caused a substantial sale of up to $214m per hour .
This indicator of the extent of the panic created by the verticality of the BTC price action over the past few hours speaks to the willingness of participants to (sometimes force) sell long positions.
Historically, spot markets had not seen a similar sell-off since June 25, 2021 , when almost $300 million in losses were realized.
Figure 6: Distribution of Supply by Cohort and Change over 30 days
A generational buying opportunity
The cascade of liquidations described above, added to the selling pressure of the spot markets, pushes the price of BTC in its entrenchments, close to its former ATH, towards a zone of very attractive value from a long-term point of view.
The MVRV Z-Score, used to assess when Bitcoin is over/undervalued relative to its “fair value”, suggests that the market today is significantly undervalued.
Figure 7: Distribution of Supply by Cohort and Change over 30 days
This signal, rich in meaning and historically significant, registers negative values (in green) for the 6th time in its history, confirming that we are entering territory conducive to the construction of generational savings .
Summary of this on-chain analysis
Finally, this emotional week will have marked the entry of the price of Bitcoin (BTC) into a statistically attractive price zone .
Following yesterday’s cascade of liquidations, and considering the losses realized on the spot markets, we can say that we are closer to the end of the bear market than to its beginning .
However, given the deteriorating macroeconomic and geopolitical context, the persistence of speculative risk and the latent losses still held by participants, the time has not come to expose oneself to unconsidered risk .
Let us note to conclude the risks of margin calls incurred by Celsius and MicroStrategy , at respective liquidation prices of $14k and $21k, the advent of which could cause unprecedented selling pressure worthy of the Mt. Gox business debacle and Terra/LUNA.
Sources – Figures 1 to 7: Glassnode , Figure 5 : Coinglass
