Bitcoin price hovers around $40K, but derivatives data remains bullish

Since the price of Bitcoin fell from a high of $52,952 to a low of $42,800 in just two hours on September 7, Bitcoin has been going through a period of intense volatility. More recently, support at $45,000 held for a few days despite Bitcoin being severely tested, which sparked a swing up and down $3,400 on Sept. 13.

There is no doubt that bears (traders who bet on falling prices) have gained the upper hand since September 7, when $3.54 billion worth of call (buy) futures contracts were liquidated.

MicroStrategy announced on September 13 that it had accumulated more than 5,050 bitcoins at an average price of $48,099, which was not enough to rebuild confidence, and the price of bitcoin remained unchanged around $44,200.

The U.S. Treasury Department has discussed potential regulation of private stablecoins, Reuters reported on Sept. 10, and while the impact of bearishness may be felt, it’s more likely that regulatory concerns continue to dampen the market.

Regulators have become increasingly interested in stablecoins as their market capitalization has grown from $37 billion in January to $125 billion today. Additionally, both Visa and Mastercard reiterated their interest in stablecoin-related solutions.

Whatever the reasons behind the current price weakness, derivatives contracts have been showing a bullish sentiment since Aug. 7.

Professional traders have been bullish for the past five weeks

Quarterly Bitcoin futures are the tool of choice for whales and arbitrageurs because they have the distinct advantage of non-volatile funding rates. However, these can appear complicated to retail investors due to their settlement dates and price differentials to the spot market.

When a trader opts for a perpetual contract (inverse swap), the derivatives exchange charges a fee every eight hours, depending on which side requests more leverage. Meanwhile, contracts with fixed-date expirations often trade at higher prices than normal spot market transactions to compensate for delayed settlement.

Three-month bitcoin futures annualized premium Source: Laevitas

In a healthy market, expect an annualized premium of 5% to 15% because the funds locked in these contracts could have been used for lending opportunities. This situation is known as contango and it happens to almost every derivative instrument.

However, the metric can fade or turn negative in bear markets, triggering a red flag known as "backedness."

The chart above shows that on August 7, the premium (the benchmark rate) rose above 8% and has maintained a mildly bullish momentum since then. So while Bitcoin has tested sub-$44,000 levels twice in the past 15 days, the data is surprisingly healthy with little sign of a lack of confidence.

Futures open interest remains healthy

The $3.54 billion in liquidations across the derivatives market on Sept. 7 certainly hurt overleveraged traders, but open interest in Bitcoin futures remains healthy overall.

Bitcoin futures cumulative open interest (USD) Source: Bybt

See how the current figure of $14.8 billion is 23% higher than the June and July average of $12 billion. This contradicts some speculation that traders have been heavily influenced and reluctant to take positions due to Bitcoin’s volatility or fear of an impending bearishness.

There is no doubt that investors are neutral or bullish on the market, at least as far as the futures market is concerned, despite the recent pullback in prices. Of course, traders should keep an eye on important resistance levels, but $44,000 is holding firm so far.

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