Futures open interest might hint at market top...

[adaseb]

Providing an update because I see some divergence in the funding and price. Looking at,
https://www.bybt.com/BitcoinOpenInterest

It seems that price is going up, while open interest is going down. Also the funding is flat and sometimes negative.

What will soon happen is those that are short perps, will not want to lose money and they will either close their short perps by buying back the short and selling spot. Or they will just move into the futures months. However right now the June 2021 futures is only 3.5% so if people move from perps to futures, eventually the premium will disappear.

If the premium disappears people who are short futures will eventually close and sell spot. And we might see a huge dump where people are closing high leverage short positions by buying on derivatives and selling spot.

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[adaseb]

Providing another update!

So the purpose of this thread was to prove my theory. Will the futures predict a market top?

So right now the May and June Bitcoin futures are trading at a discount. A few months prior the June futures was trading at 10-15%. Which means tons of people did a cash and carry trade. They bought spot BTC and now they are closing their cash and carry trade. So they are dumping BTC while they are covering their future short and profiting the 10-15% premium.

So I am going to be watching the monthly futures closely and what we will see is the open interest go down. And this will lead to selling pressure. So if price is trading sideways or upwards AND open interest is heading downwards, it means there is massive sell pressure from cash and carry trades. So we might easily head into the $35K's area before heading back up to ATH.

[STT]

Sounds like a good theory to me, market will tend to over react like a car braking too hard with worn shocks it will easily cause an over reaction and we run over the top of what would normally curb prices in volume resistance and support.  This effect scares market participants even outside this futures market into ordinary users and holders and we develop a trend that requires greater limits to arrest the fall.   200 day average might be such an area of very large acknowledged trend, the MA is still rising and this remains a positive market still on wider time frames.  35k would seem to be an overreaction in this month anyway, it can happen but also I expect us to control this selling and return upwards sooner rather then later; a short seller is a future buyer.
  Closing daily bar end of Feb is 45.3k and Im watching that as quite critical as we have broken a range true for some months, regaining that would mean alot.

[nelson4lov]

Providing another update!

So the purpose of this thread was to prove my theory. Will the futures predict a market top?

So right now the May and June Bitcoin futures are trading at a discount. A few months prior the June futures was trading at 10-15%. Which means tons of people did a cash and carry trade. They bought spot BTC and now they are closing their cash and carry trade. So they are dumping BTC while they are covering their future short and profiting the 10-15% premium.

So I am going to be watching the monthly futures closely and what we will see is the open interest go down. And this will lead to selling pressure. So if price is trading sideways or upwards AND open interest is heading downwards, it means there is massive sell pressure from cash and carry trades. So we might easily head into the $35K's area before heading back up to ATH.

Thanks for the update. Prior to following the thread, I didn't know open interest can be used as a metric to analyse market activity. But thanks to you, I know that now. Judging from the recent market movement, I'd say it's true that majority of the new investors opted for cash and carry trade and are taking advantage of the premiums that came with their purchase. However, I think this is just temporary as they could buy back later on and ride it back to all time high. I don't know much but my intuition is telling me that the top isn't in yet. Right now, the price is falling along with the open interest (which is down ~10%  in last 24hrs). If these continues, I believe we're retesting $40k.

[adaseb]

So I guess this thread is concluded pretty much. What I predicted pretty much happened.

For most of April and May the funding rate was mostly flat, then when we started to head towards $40K, the May and June futures started to trade with no premium. Then as we broke $40K, they started to trade at a discount.

Then what happened is exactly what I predicted. Everybody that did cash and carry would close the trade. They closed their short and had to dump their BTC spot holdings which led to this massive crash. Hence the huge crash and huge OI decline by 30%.

So there is a good chance that $65K might of been the top for this cycle. Hard to say, maybe 50% sure.

[rahmatrf331]

This is not investment advice. I am not a financial advisor. I am just posting this for entertainment purposes.
Please POST relative information to the topic. Any low quality posts will be deleted

Where will Bitcoin top? We just broke $50K? So is $100K next. What about $250K. Honestly its impossible to predict the top. Easier honestly to predict when a bottom will happen rather than a top.

So what can you do to sell as close to the top as possible? I think we can analyze the bitcoin futures open interest.

Currently this is the open interest for BTC futures.
https://www.bybt.com/BitcoinOpenInterest

As you can see, in the last 12 months we went from $3.5B to $18.75B. This is crazy since back in 2018 the largest open interest was maybe $1.5B or so.

Why is the open interest so high? Well I think part of it is people going full leverage to make the most money possible. Another part can be people capturing the premium.

Currently its expensive to borrow fiat to go long on bitcoin. Most exchanges have run out of available USD funds to buy crypto and others have crazy funding rates. So hence why there is always a positive funding on BTC and ETH, usually 0.25% per day lately. Hence if you look at the June futures for BTC, they are currently at 11%.

So I think alot of the money that is entering crypto now, is mostly cash and carry trades. Someone prints $100,000,000 USDT and they invest that to capture the 11% premium within 4 months. Which is about 33% APR. Where else can you get that kind of interest.

Here is how its done.

Someone sends $100,000,000 (or any amount) to a crypto exchange.
They buy $100,000,000 worth of ETH or BTC on spot and at the same time they sell $110,000,000 contracts on the June futures exchange.
Wait 4 months. Sell the spot holding and get back $100,000,000 while they buy the 111,000,000 contracts position and they will net $11,000,000 in profit.


The reason this works is because currently the markets are balanced, there is lots of liquidity on both markets. The trouble might come when the premium dries up.

Say next month or in 2 months the 11% premium goes down to 1%. Most likely the arbitrator will want to close the position and get their 10% early rather than wait longer to get another 1%.

So what happens is they need to unload $100,000,000 worth on spot and buy $110,000,000 on futures.  The issue here is, eventually the bid side on the spot market might not be able to handle all this selling pressure. The futures exchange has 100x leverage so it can usually handle this type of volume. But if there are billions of these positions that are getting unwinded who will be able to close them?

Also consider this.

Say you short 1 BTC at $50,000 by "cash and carry" method. And price is $25,000 when you want to close. You will gain another 1 BTC in profit. So to close the trade you will need to sell 2 BTC to get back your $50,000. And as the price of BTC goes lower and lower that means more and more BTC supply needs to hit the bid side to close the trade.

Eventually what might happen is similar to what happened with Bitmex back in March 2020. The market was leverage long and there was billion of long liquidations and nobody to cover them. Hence why we got that flash crash.

There is alot of money entering crypto. However at these prices how do we know that this money is to actually spot long BTC and not do these "cash and carry" trades? We see these huge tether prints. How do we know its someone who is buying for long term cold storage spot hold? Or someone just milking the premium?

Leverage is very powerful. Especially 100x. Someone with basically $500 cash can long about 1 BTC worth using 100x leverage. Hence someone on the other side of that trade can arbitrage that 1 BTC worth, by actually buying $50000 without leverage on spot. Hence there is a similar type of squeeze going on here to a gamma squeeze. The issue will be when these bids disappear. Because that $50000 futures position will eventually need to be closed by someone selling $50000 worth of spot and if the money isn't there then there will be a long squeeze.

TL:DR Wait until the open interest starts to decline and no premium on the future contracts. Then most likely some large crash might be coming.

This post looks like a predictive picture of the development of bitcoin.

I completely agree with this information, because this can be a source of reference for me to analyze crypto developments in the future.

This information is very important to underline, because as an investor when to buy and when to sell. predicting wrong can result in big losses.