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Bitcoin Derivatives Trading Futures Friday

Bitcoin futures data shows room to grow since retail sat out recent rally

2021.07.31 Hunain Naseer

A green week for BTC saw retail traders missing the action.

In last week's edition of Futures Friday we highlighted the buying interest at sub-$30,000 levels for Bitcoin and have since had the leading digital currency post gains for five out of the last seven days. From last Friday’s close around $32,000 to today’s high around $40,000, BTC has appreciated roughly 25%.

This week's gains, however, have brought BTC all the way up to the long-standing resistance level at $40,000. Bitcoin has found it difficult to breach this level since the May crash and has remained range-bound in the zone between $30,000 and $40,000 for about 70 days now.

Looking at futures contracts, the current quarterly contract BTCUSD0924, which expires at the end of September, is trading at $39,040, with a premium of around $290 over spot BTC. Last week, the premium was around $160. Meanwhile, BTCUSD1231, which expires in December, is trading at $40,004, with a premium of over $1,200 — nearly double that of last week's.

Even the weekly futures contract is trading at a positive premium after several weeks in the negative. This change reflects the market's optimism in the short- and mid-term.

BTC basis for weekly futures contract on OKEx

The BTC spot price has seen a gradual increase over the week with minor pullbacks. However, as mentioned earlier, the market leader is currently facing the $40,000 resistance, and a breach of this level will set the tone for the coming weeks.

OKEx BTC spot price on July 30, 2021, with blue arrows marking Fridays. Source: OKEx, TradingView

OKEx trading data readings

Visit OKEx's trading data page to explore more indicators. The charts below have orange circles marking their positions in the previous week for comparison.

BTC long/short ratio shows retail missed the run

Even last Friday, the long/short ratio reflected market uncertainty, but this week the trend has noticeably run opposite to the price action.

The ratio, which stood at around 1.17 last week, is currently around 1.05, even though the price has appreciated over 20% since then. While there was a minor surge around July 27, the ratio has largely remained depressed, indicating that retail traders have not opened positions en masse despite the green week.

While this lack of confidence appears negative, per se, it also means this current surge is not retail-driven and is likely to be more sustainable. If BTC does manage to breach $40,000 from this level, we could see retail jumping in, pushing the price even higher.

BTC futures long/short ratio on OKEx

The long/short ratio compares the total number of users opening long positions versus those opening short positions. The ratio is compiled from all futures and perpetual swaps, and the long/short side of a user is determined by their net position in BTC.

In the derivatives market, whenever a long position is opened, it is balanced by a short position. The total number of long positions must be equal to the total number of short positions. When the ratio is low, it indicates that more people are holding shorts.

BTC basis shows room for price appreciation

The basis for the quarterly contract is around $290 at the moment and went as high as $382 earlier in the week. While the basis itself is marginally positive, what is notable is that the last time BTC was priced similarly (June 13, 2021), the basis stood around $1,100.

This shift once again indicates that retail traders are not very bullish on BTC despite the recent price surge. This also means that the current price appreciation was not accompanied by the same hype and that there is room for BTC to go much higher if sentiment turns bullish and premiums start piling up to previous levels.

BTC quarterly futures contract basis on OKEx

This indicator shows the quarterly futures price, spot index price and also the basis difference. The basis of a particular time equals the quarterly futures price minus the spot index price.

The price of futures reflects the traders' expectations of the price of Bitcoin. When the basis is positive, it indicates that the market is bullish. When the basis is negative, it indicates that the market is bearish.

The basis of quarterly futures can better indicate the long-term market trend. When the basis is high (either positive or negative), it means there's more room for arbitrage.

Open interest shows growth in activity

The open interest was in a downtrend for the previous few weeks but saw slight improvement last Friday, going from around $1.3 billion to $1.38 billion.

As discussed in previous editions of Futures Friday, each Friday marks a sharp drop in the OI because of the weekly futures expiring. This drop is temporary and is followed by a recovery as new positions open. We've used this sharp drop in the past to illustrate the general OI trend and this week we see an uptrend.

In the absence of a surging long/short ratio, this could indicate that retail traders are shorting BTC, but it could also mean that fewer but larger positions have been opened by non-retail traders, causing both the price and OI to grow while retail traders stay out.

Either way, what is evident is that activity is on the rise, and that's a sign of market enthusiasm gradually improving again.

BTC futures open interest and volume on OKEx

Open interest is the total number of outstanding futures/swaps that have not been closed on a given day.

Trading volume is the total trading volume of futures and perpetual swaps over a specific period of time.

If there are 2,000 long contracts and 2,000 short contracts opened, the open interest will be 2,000. If the trading volume surges and the open interest decreases in a short period of time, it may indicate that a lot of positions are closed, or were forced to liquidate. If both the trading volume and open interest increase, it indicates that a lot of positions have opened.

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Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.