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

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.

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

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.

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.

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.

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.