Bitcoin Rally is Back On, but Futures Activity Says it Never Left

Bitcoin Rally is Back On, but Futures Activity Says it Never Left

If the stock market goes down, and inflation keeps eating away at USD, will BTC be the biggest beneficiary?
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

The Bitcoin derivatives market is going strong despite increased fear per crypto’s Fear & Greed Index (FGI). It seems that the appearance of Omicron created a lagging effect on the open interest vs. FGI, but Bitcoin’s rally should be on schedule.

What Happened to Bitcoin in November?

November has been a rough month for Bitcoin investors. Just as the Fear & Greed Index was closing toward ‘Extreme Greed’ on November 9th, at 84 points (out of 100), a day later Bitcoin reached an ATH of $69k. At that point, steep drops began to take place, five times in total (at time of writing), representing a roughly 18% decline from November 10.

Bitcoin’s price moves during November suffered 5 crashes, mainly due to liquidations from the derivatives market. (image credit: TradingView.com)

In turn, the Fear & Greed Index bottomed from high Greed at 84 to Fear, at present 32 points.

Crypto Fear & Greed Index, (image credit: alternative.me)

The question is, why did the first drop occur? It turns out, it’s largely due the effect of open interest positions. Futures contracts are a type of derivative where traders place bets on whether the price of BTC goes up (long position) or down (short position). In turn, the total number of such contracts represents open interest.

What matters the most when viewing the impact on BTC’s price is that such contracts use more BTC as collateral, and less USD or stablecoins. For long positions, if the price turns sour, traders are exposed to not only losses but their collateral drops in value as well, if it is collateralized in BTC.

Therefore, it was the case that the aggregated open interest of Bitcoin futures hit a peak on November 10, 2021, at $28.85 billion.

With all that derivatives pressure, a liquidation event occurred, causing the market drawdown. However, what is interesting is that the futures market largely remains unfazed by it.

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Not the Historical Norm: Strong Fear Alongside Strong Open Interest

On November 28th, Bitcoin rallied by 5%, recovering the last steep drop two days prior. During that retracing period, BTC open interest went from only $23.29 billion to $22.78 billion, and is now up again at roughly $23.47 billion (at time of writing). Simultaneously, the Fear & Greed Index hit the lowest level not seen since September 30, at 21 points.

During 2021, FUD coming from Elon Musk and China in May almost brought Bitcoin to its Extreme Fear knees. (image credit: alternative.me)

Yet, open interest quickly bounced back, without the Fear & Greed Index following suit. This is quite telling because the two tend to correlate with each other strongly. Meaning, if the crypto market becomes fearful, open interest typically drops as well.

Relationship between the Fear & Greed Index and Open Interest activity. (image credit: Delphi Digital)

What does that mean for Bitcoin investors? The futures liquidations coincided with the news about the new “Omicron variant”, taking its toll on the stock market, with the S&P 500 dropping by 1.2% and Nasdaq composite dropping by 1.8%. However, the fear it triggered within the crypto market should be viewed as one that should dissipate quickly.

After all, in times of distress, Bitcoin shines due to its anti-fragility, as an asset detached from the manipulated central banking monetary system. Such a view is shared by even traditional investors, most notably the experienced billionaire investor Ray Dalio of Bridgewater Associates.

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Many crypto investors were waiting for fear to spread and Bitcoin’s price to drop, as this is typically the most opportune moment to buy the dip. Were you one of them? Let us know in the comments below.

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