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Bitcoin Futures Frenzy Fizzles Out As Price Plunges Below $26,000

The crypto market has lost its sparkle lately, with bitcoin futures trading volume drying up as the flagship cryptocurrency struggles to stay afloat. 

Bitcoin futures open interest, which measures the buzz around upcoming contracts, has dropped to a 5-month low of $11.3 billion, according to data from Glassnode. This suggests traders are closing out positions and reducing exposure to volatile crypto assets. 

Bitcoin’s Struggles Below $26K: Is The Crypto Craze Losing Steam?

The disinterest comes as bitcoin prices dropped below $26,000 for the first time since August, dampening spirits across the crypto sphere. 

“It seems the market is running out of steam,” said Lee Reiners, professor of cryptocurrency law at Duke University. “Investors are realizing these assets don’t just go up forever.”

Analysts said that the drop in open interest appears related to the expiration of monthly and quarterly futures contracts, which drained trading activity and liquidity.

But the decline also signals fading confidence in Bitcoin’s upside potential amid mounting regulatory scrutiny, environmental backlash, and competition from alternative cryptos like ether.  

“The promise of quick riches that lured many retail investors now seems a distant dream,” said Jamie Dimon, CEO at JP Morgan. “The crypto craze appears to be losing momentum fast.”

Bitcoin has struggled to regain traction since its record high of nearly $69,000 in November 2021. Though some crypto bulls remain hopeful, continued lackluster performance could stall wider adoption.

BTCUSD

Exploring The Factors Behind Bitcoin’s Declining Fortunes

One significant factor is the regulatory scrutiny that has intensified worldwide. Governments and financial authorities are increasingly concerned about the potential risks associated with cryptocurrencies, including money laundering and tax evasion. This regulatory uncertainty has made some investors wary and hesitant to enter or remain in the market.

Bitcoin has faced backlash due to its environmental impact. Critics argue that the energy-intensive process of mining Bitcoin is unsustainable and contributes to carbon emissions. As environmental concerns take center stage, some investors and institutions may reevaluate their support for Bitcoin in favor of more environmentally friendly cryptocurrencies.

While Bitcoin pioneered, newer cryptocurrencies like Ethereum have gained traction, offering innovative features such as smart contracts and decentralized applications. These alternatives have attracted both developers and investors, diverting attention away from Bitcoin.

Bitcoin’s Future: Crossroads For The Original Crypto

For diehard believers, bitcoin’s funk may present a buying opportunity if prices continue drifting lower. But others argue that “digital gold” has lost its luster for good.

“It’s yet to be seen whether Bitcoin can reclaim its role as the crypto market’s flagship,” said Chen Alicia, a student of blockchain studies at NYU.

With futures interest shrinking, bitcoin is at a crossroads. Does the original crypto still have a bright future, or will up-and-comers displace it?

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CryptoQuant Discusses How Bitcoin Has Changed In Past 1 Year

The on-chain analytics firm CryptoQuant has discussed how the Bitcoin market has changed during the past year.

Bitcoin Has Been Going Through Some Changes Recently

In a new post on X, CryptoQuant has broken down the changes that the cryptocurrency’s landscape has observed recently. The first would be that the US-based exchanges have been registering withdrawals, while the global platforms have seen growing holdings.

The relevant on-chain indicator here is the “exchange reserve,” which keeps track of the total amount of Bitcoin stored inside the wallets of a centralized exchange or a group of exchanges.

First, here is a chart that shows the trend in this metric for the foreign platforms:

Bitcoin Exchange Reserve

The above graph shows that the Bitcoin exchange reserves for Binance, Bitfinex, and OKX have increased during the past year. In total, the indicator’s value for these non-US platforms has increased by 10% in this period.

This increase would naturally suggest that these exchanges have seen net deposits in the last year. However, the exchange reserve for the US-based platforms paints a different picture.

Bitcoin US exchanges

While the foreign exchanges have seen deposits, the platforms based in the US, such as Coinbase, Gemini, and Kraken, have observed declining reserves during the past year.

In general, the reserves of these platforms have dropped by at least 30%, which is a very significant value. The opposite trends being followed by the two groups of exchanges could imply a migration of coins between them, with investors increasingly preferring the non-US platforms.

The second change in the BTC market is that institutional investors have started displaying an accumulation behavior. “Considering the amount withdrawn and the deposit and withdrawal records of the wallets, institutions are continuously buying Bitcoin,” explains the analytics firm.

CryptoQuant notes that in August alone, Gemini has seen a huge withdrawal of more than 20,000 BTC, which can be a sign that institutional investors are buying.

Bitcoin Gemini

Finally, there is a change in how market participants have been looking at the futures sector recently, as they have increased their exposure to derivative products.

The ratio of the trading volume of the asset between spot and derivative platforms has dropped to pretty low values recently, a sign that activity on the derivative exchanges is overwhelmingly more than on the spot ones.

Bitcoin Trading Volume Ratio

The open interest, a measure of the number of positions open on the derivative market, also showcases this change, as the metric’s value hit very high just recently.

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The chart shows that while the open interest was at highs just a while ago, it has since observed a plummet. The reason behind this plunge was the latest Bitcoin crash, which resulted in a cascade of liquidations in the market.

BTC Price

Bitcoin is trading around the $25,900 level, unchanged from one week ago, showing how stagnant the cryptocurrency has been recently.

Bitcoin Price Chart

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Will Bitcoin Volatility Continue? These Metrics Say Yes

Bitcoin has observed some sharp price action today, and if data of these metrics is to go by, the asset may not be done being volatile just yet.

Bitcoin’s Open Interest And Leverage Ratio Have Remained High

As explained by an analyst in a CryptoQuant post, some metrics are forming a pattern that can lead to more volatility in the cryptocurrency’s price. These indicators are the open interest and the estimated leverage ratio.

The “open interest” refers to the total amount of Bitcoin futures contracts that are open on all derivative exchanges. An increase in this metric suggests that the investors are opening more positions on the futures market right now, while a decrease implies some of them are closing their positions, or are getting liquidated.

The other metric of interest here, the “estimated leverage ratio,” keeps track of the ratio between the open interest and the derivative exchange reserve (that is, the total amount of Bitcoin sitting in the wallets of these derivative platforms).

What this metric tells us is the amount of leverage that futures users are opting for on average. High leverage can significantly increase the risk of a large number of contracts being liquidated, so whenever this metric has a high value, the market can become more probable to show high volatility due to violent liquidation events.

Now, here is a chart that shows the trend in these two Bitcoin indicators over the past few days:

Bitcoin Open Interest & Leverage Ratio

As displayed in the above graph, the Bitcoin open interest and estimated leverage ratio had both been at relatively high values right before the plunge that the asset saw in the past 24 hours.

In this sharp price plummet, the futures market naturally observed a high amount of liquidations, leading to the open interest registering some decrease. The metric, however, didn’t actually see that much of a cool down despite these liquidations, and it has now already reached back to the same levels it was at before the volatility.

This would suggest that the futures market users have opened new positions since the mass liquidation event. While the open interest had gone down in this event, albeit briefly, the leverage ratio actually hadn’t budged even that much.

Rather, the indicator has only been going up, implying that the users opening up the new futures contracts are only opting for higher and higher amounts of leverage.

Because of the open interest rebounding and the leverage ratio only trending higher, it would appear like a reasonable possibility that the Bitcoin price would observe more volatility in the near future.

Such volatility can take the coin in either direction, but generally, the side of the market with the less amount of contracts is the more probable one.

In the chart, the data for the “funding rates” is attached, which basically tells us whether the longs or the shorts are dominant in the futures market currently.

The funding rates had been positive in the latest futures market overheat, as well as in the one seen earlier in the month, but following today’s long liquidations, the metric has turned negative. This may suggest that a liquidation event involving the shorts is more likely to happen next.

BTC Price

At the time of writing, Bitcoin is trading around $28,500, down 3% in the last week.

Bitcoin Price Chart

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Bitcoin Short Squeeze: $93 Million Shorts Liquidated In One Hour

Data shows a large amount of shorts have been liquidated in the Bitcoin futures market in the past day as BTC pushes above $19,000.

$93 Million Bitcoin Shorts Were Wiped Out In Only 1 Hour

As per data from the on-chain analytics firm Glassnode, short liquidations have spiked in the past day. A “liquidation” takes place when a derivative exchange has to forcibly close up a contract on the Bitcoin futures market.

Contracts usually liquidate when a certain percentage of the margin – the collateral amount that the holder had to put up in order to open the position, is lost due to the BTC price moving opposite to the direction the investor bets on.

In the crypto futures market, large liquidations happening at once isn’t an uncommon sight due to a couple of reasons. First, most of the assets in the sector are generally very volatile, so sudden price swings can take place without warning.

And second, many derivative exchanges offer leverage (a loan amount taken against the margin) as high as 100x in the original position. High leverage being accessible in a volatile environment like this results in a large risk of positions being liquidated.

Now, the relevant indicator here is the “total futures liquidations,” which tracks the total amount of both short and long liquidations that are taking place in the Bitcoin futures market currently.

Here is a chart that shows the trend in this metric over the last few months:

Bitcoin Futures Liquidations

As displayed in the above graph, the Bitcoin futures liquidations have mostly involved short contracts in the last few days. This trend makes sense, as a sharp upwards move in the price was the trigger for these liquidations.

During the FTX crash back in November, which observed the opposite kind of price move, a large number of longs were wiped out instead, as can be seen from the chart.

Usually, a large enough rapid move in the price can trigger simultaneous mass liquidations that only feed said price move further. This amplified price move then liquidates even more contracts, and in this way, liquidations cascade together. A mass liquidation event like this is popularly called a “squeeze.”

Glassnode notes that $93 million in short contracts were flushed in just a single hour during the past day. These rapid liquidations suggest the Bitcoin rally triggered a short squeeze in the futures market.

The price has now shot up even more following this squeeze, as is generally the case, and BTC is now above $19,000 for the first time since the collapse of the crypto exchange FTX.

BTC Price

At the time of writing, Bitcoin is trading around $19,000, up 13% in the last week.

Bitcoin Price Chart