CME Bitcoin futures show investors betting on $40K BTC price

The demand for institutional investors for Bitcoin (BTC) became evident on Nov. 10 as the Chicago Mercantile Exchange (CME) Bitcoin futures flipped Binance’s BTC futures markets in terms of size. According to BTC derivatives metrics, those investors are showing strong confidence in Bitcoin’s potential to break above the $40,000 mark in the short term.

CME’s current Bitcoin futures open interest stands at $4.35 billion, the highest since November 2021 when Bitcoin hit its all-time high of $69,000 — a clear indication of heightened interest. But is it enough to justify further price gains?

CME’s remarkable growth and the spot Bitcoin ETF speculation 

The impressive 125% surge in CME’s BTC futures open interest from $1.93 billion in mid-October is undoubtedly tied to the anticipation of the approval of a spot Bitcoin exchange-traded fund (ETF). However, it’s important to note that there’s no direct correlation between this movement and the actions of market makers or issuers. Cryptocurrency analyst JJcycles raised this hypothesis in a Nov. 26 social media post.

What if CME (US institutions) opened longs to hedge for the spot #Bitcoin ETF approval which might be imminent?

Open interest surely surged on CME in the last couple of weeks.

✍️ pic.twitter.com/poFpuOidL0

— JJcycles (@JJcycles) November 26, 2023

To avoid the high costs associated with futures contracts, institutional investors have various options. For instance, they could opt for CME Bitcoin options, which require less capital and offer similar leveraged long exposure. Additionally, regulated ETF and exchange-traded notes (ETN) trading in regions like Canada, Brazil and Europe provide alternatives.

It seems somewhat naive to believe that the world’s largest asset managers would take risky gambles using derivatives contracts on a decision that depends on the U.S. Securities and Exchange Commission and is not expected until mid-January. Yet, the undeniable growth in CME Bitcoin futures open interest is hard evidence that institutional investors are setting their sights on the cryptocurrency.

It might seem naive to think that the world’s largest asset managers would take significant risks with derivatives contracts on a decision dependent on the SEC, expected only in mid-January. However, the undeniable growth in CME Bitcoin futures open interest underscores the increasing interest of institutional investors in the cryptocurrency market.

CME’s Bitcoin futures signaled extreme optimism on Nov. 28

While CME’s Bitcoin futures activity has been steadily rising, the most noteworthy development has been the spike in the contracts’ annualized premium (basis rate). In neutral markets, monthly futures contracts typically trade with a 5% to 10% basis rate to account for longer settlement times. This situation, known as contango, is not unique to cryptocurrency derivatives.

On Nov. 28, the annualized premium for CME Bitcoin futures surged from 15% to 34%, eventually stabilizing at 23% by day’s end. A basis rate exceeding 20% indicates substantial optimism, suggesting that buyers were willing to pay a substantial premium to establish leveraged long positions. Currently, the metric stands at 14%, indicating that whatever caused the unusual movement is no longer a factor.

It’s worth noting that during that eight-hour period on Nov. 28, Bitcoin’s price rose from $37,100 to $38,200. However, it’s challenging to determine whether this surge was driven by the spot market or futures contracts, as arbitrage between the two occurs in milliseconds. Instead of fixating on intraday price movements, traders should look to BTC option markets data for confirmation of heightened interest from institutional investors.

Related: Why is the crypto market down today?

If traders anticipate a decline in Bitcoin’s price, a delta skew metric above 7% is expected, whereas periods of excitement typically result in a -7% skew.

Over the past month, the 30-day BTC options 25% delta skew has consistently remained below the -7% threshold, standing near -10% on Nov. 28. This data supports the bullish sentiment among institutional investors using CME Bitcoin futures, casting doubts on the theory of whales accumulating assets ahead of a potential spot ETF approval. In essence, derivatives metrics do not indicate excessive short-term optimism.

If whales and market makers were genuinely 90% certain of an SEC approval, in line with the expectations of Bloomberg’s ETF analysts, the BTC options delta skew would likely be much lower. 

Nonetheless, with Bitcoin’s price trading near $38,000, it appears that bulls will continue to challenge resistance levels as long as the hope for a spot ETF approval remains a driving force.