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Options And Derivatives Update
One dynamic and chart we’ve covered extensively before is bitcoin’s perpetual futures market funding rate compared to price. In the previous 2021 bull run, the perpetual (perps) futures market played a key role in moving short-term prices to both the upside and downside with excessive leverage. It’s worth reviewing the state of the derivatives market and the system’s current leverage as bitcoin price has broken down from its latest rally, following U.S. equities on a potential path towards new lows.
Messari’s real spot volume (7-day moving average adjusting for inflated exchange volumes) of $5.7 billion, the perps market trades nearly five times the volume to spot markets. On top of that, daily spot volume is down nearly 40% from last year, a statistic to help understand just how much liquidity has left the market.
Given the volume of the bitcoin derivative contracts relative to spot markets, one may arrive at the conclusion that derivatives can be used to suppress bitcoin. We actually disagree, given the dynamically priced interest rate associated with bitcoin futures products, we believe that on a long enough time frame the effect of derivatives is net neutral on price. While bitcoin likely exploded much higher than it otherwise would have due to the reflexive effects of leverage, those positions eventually were forced to close, thus an equal negative reaction was absorbed by the market.
