30 Aug 2022

Downside consensus in the derivatives market

This weekend, bitcoin futures went into backwardation following Jerome Powell’s hawkish comments at the Jackson Hole.
Derivates (11).svg
The futures basis experienced further downward pressure last week, leading both Binance and CME to trade below the spot market.
Source: Skew * Closed Sat-Sun
Shorts are the dominating force in the futures market, with few traders willing to add long exposure, leading futures to trade at discounts to spot. CME’s futures closed at a sharp discount on Friday of 3% but have since recovered, still trading at a discount to the spot market of -0.92%. CME’s backwardation is likely exaggerated by growing inflows to BITI and outflows from BITO, both having pressuring effects on CME’s futures.FTX still trades in a slight premium to the rest of the offshore market, but also FTX’s futures trade near or at all-time lows.The downward push in the futures basis has sent the offshore basis into a new multi-year low, below the lows experienced following the crypto credit crisis of June, indicating a very bearish short-term sentiment from futures traders.
Offshore basis reaches multi-year lows
The average daily offshore futures basis reached negative levels on Sunday, August 28th. This has not happened since March 2020.
Source: Skew
Following the Jackson Hole, shorts piled in and longs covered, leading futures prices to plunge towards a multi-year low. Throughout the weekend, the average daily futures basis across all offshore derivatives venues averaged in negative territory for the first time since the devastating March 2020 crash. This illustrates the bleak sentiment in the market, with the downside protection trade becoming a strong consensus trade.
Funding rates remain in negative territory
Funding rates have mostly remained negative in the last two weeks, reaching new lows on Monday.
Source: Skew, Bybit
Perpetual swaps continuously trade at a discount to the spot market, leading to stickiness in negative to below neutral funding rates.On Monday, the Binance funding rate reached new Q3 lows, declining to lows not seen since June 30th. Few traders seem willing to add risks in the current state of the market.Binance has not seen funding rates above neutral levels since December 4th, 2021. The 9-month funding rate drought streak is by far the longest period experienced of funding rates at or below neutral levels.Alongside the persistent bearish sentiment in perps, open interest has seen a linear growth throughout the year, without any major setbacks. Open interest in BTC perps sits at a clear all-time high in notional terms, as illustrated below.
Open interest on a vertical venture
Open interest in bitcoin perps has been going vertical throughout the year and is up 113% from the December 6th bottom after reaching yet another BTC-denominated high of 398,075 BTC on Monday.
Source: Laevitas
Perpetual swaps continue to see surging open interest in notional sizes, and the open interest in BTC-denominated perps has now reached 398,000 BTC, surpassing 2% of the circulating BTC supply. During the December 4th crash last year, the BTC-denominated open interest plunged to 186,158 BTC and has since grown 113% in notional size seeing a near linear uptrend. The growth in open interest has been very unusual, without any significant flushes during the May and June crashes. This is vastly different from what we experienced during the May and December crashes in 2021. The fact that we’ve seen few significant drawdowns in OI suggests that traders are currently more conservative with high leverage compared to 2021.
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