16 May 2022

Derivatives update: Chaotic deleveraging and wildly negative funding rates

Following last week’s mayhem in the markets, we see growing differences in the futures premiums across various venues, with FTX trading at a significant premium. Meanwhile, funding rates on Binance reached its lowest level since July 26th, 2021.
Source: CME
Last week created a uniquely volatile pattern in the BTC futures. The USDT discount likely impacted the Binance futures settled in USDT, which might have had sticky effects on the Binance premiums, leading Binance to trade at a sustained discount compared to FTX. Currently, FTX futures trade at a 4.5% annualized basis, compared to the 2.92% basis of Binance. It’s been a while since we’ve seen similar deviations in futures premiums, the last time we saw deviations of a similar relative difference was following the July 26th short squeeze. On CME, the futures basis remains low, currently sitting at 1.16%, suggesting that institutional traders remain cautious at the moment. Nevertheless, for the first time in history, investors have a net long exposure in CME’s BTC futures. The growing net long exposure in CME is likely caused by the futures-based ETFs. These ETFs have seen muted flows over recent weeks, and most activity tends to occur during the rolling week. Meanwhile, general trading activity remains idle in between, leading to a diminishing basis. This creates an unprofitable cash-and-carry environment, likely leading the net short exposure on CME to decline.
Largest weekly liquidation volume in 2022
Last week saw the largest liquidation volume in the bitcoin futures market since December 4th.
Source: Coinglass
The steep sell-off last week caused $0.73bn worth of long liquidations and $0.49 worth of short liquidations in bitcoin futures and perps. This is the highest liquidation volume seen in the bitcoin futures since December 4th. Compared to H1, 2021, these liquidation volumes are very muted. However, as we’ve previously stated, both Binance and Bybit have obfuscated their liquidation data, making this metric less reliable. Thus, this metric is likely to underestimate the liquidation volumes significantly. Below, we show that open interest in perps plummeted last week. The decline was particularly sharp on Binance, indicating substantial liquidations not visible in this liquidation metric.
Open interest see substantial fall but remains elevated
Open interest in perps fell by 35,000 BTC last week, mostly driven by Binance movements. This indicates significant liquidations on Binance.
Source: Skew, Laevitas
The BTC denominated open interest in perps shrunk by 35,000 BTC from an intraday peak of 282,000 BTC on May 8th to 247,000 BTC on May 14th. Accompanied by the liquidation data from above, this tells the tale of a frantic market.A myriad of factors could cause abrupt changes in the OI, and it cannot be used in isolation to assess liquidations. OI is also affected by willingly closing of longs or profit realization in shorts. Nevertheless, as Binance obfuscates its liquidation data, it’s worth examining the OI changes to assess the carnage from last week. Binance’s OI fell from a peak of 115,000 BTC on May 8th to 87,000 BTC on May 14th. This fall is equivalent to approximately $1.5bn. It’s clear that this event had deleveraging effects on the market and impacted underwater longs on Binance. Alongside the massive decline in OI on Binance, funding rates at Binance reached the lowest level since July 26th, 2021, on Thursday, May 12th. While Thursday was a deleveraging event, open interest still remains bloated, currently sitting at 260,000 BTC, on par with the early January heights.
May 12th carnage sends funding rates straight south
Last week, the massive volatility shook perp traders, as the Binance perp saw its lowest funding rate since July 26th, 2021.
Source: Skew
Funding rates plunged during the sell-off last week. Funding rates on Binance fell to -0.042% on May 12th, which is the lowest funding rate seen on Binance since July 26th, 2021.We noted last week how funding rates had neutralized despite the relative BTC weakness, indicating an influx of hopeful longs as BTC traded near the bottom of its 1.5 year long trading range. These longs were likely flushed out during the Thursday chaos, leading funding rates to plummet as perps traded substantially below spot due to liquidations. The declining OI accompanied by the unusually negative funding rates points towards a capitulation event. Alongside the absurd discounts in Tether, we see clear signals of an over-extended sell-off. With LFG’s BTC reserves cleansed, the market has room for upside. This flush has been a short-term healthy signal for the market.Funding rates have since normalized but remain below neutral, suggesting a prevailing negative sentiment in perps.
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