Crypto contagion worry rising as demand for Bitcoin perpetual futures down 40.3%

ONE of the most closely watched indicators of trader sentiment on Binance’s market-leading derivatives exchange suggests that anxiety over additional fallout from this year’s crypto market meltdown has grown.  

The seven-day average of open interest for Bitcoin perpetual futures has dropped 40.3 per cent from the start of November as of Wednesday, according to researcher CryptoCompare. Open interest is the total number of futures contracts held at the end of the trading day. Bitcoin perpetual contracts – which, unlike traditional calendar futures, don’t expire – have long been a favourite of crypto speculators because they allow them to more easily maintain leveraged bets. 

The decline comes as investors pull cryptocurrencies from exchanges such as those run by Binance, which operates the largest spot, or cash, exchange as well. Binance founder Changpeng “CZ” Zhao said on Wednesday that outflows have “stabilised” while warning employees that the industry’s recovery from rival FTX’s November collapse will be “bumpy.” Bitcoin has tumbled more than 60 per cent this year and trades around US$17,700. 

“Since Binance is the biggest derivatives exchange, it is likely that the closing of positions from major institutional market participants, who are now risk-averse, has driven the decline in OI,” said Jacob Joseph, a research analyst at CryptoCompare. “The decline in open interest suggests a lack of speculation as traders turn risk-averse as they await any further contagion in this uncertain market.” 

Other derivatives exchanges are seeing mixed comparable results, though that may be skewed because of Binance’s dominance of the sector. The seven-day average for Bitcoin perpetuals on Kraken rose 46.5 per cent since the beginning of November, according to CryptoCompare. Open interest on Bybit and OKX exchanges fell 19.1 per cent and 21.1 per cent, respectively. Crypto.com’s open interest dropped 83.1 per cent over the same period. 

Binance holds a nearly 60 per cent share of the crypto derivatives market, having traded US$1.45 trillion in November, according to CryptoCompare. Kraken’s share is under 1 per cent, while OKX and Bybit have market shares of 14.4 per cent and 11 per cent respectively, according to the researcher. CryptoCompare doesn’t track Crypto.com’s market-share data.

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Crypto derivatives is a bigger market than spot trading. When FTX announced its bankruptcy on Nov 11, the seven-day average derivatives trading volume was more than three times bigger than spot, according to CryptoCompare. Currently, it’s roughly double the size of spot.

“We are seeing that open interest on perps is starting to stabilise but certainly it’s come down pretty sharply,” said David Duong, head of institutional research at Coinbase Global, which owns derivatives tracker Skew. “That’s happening irrespective anything idiosyncratic to Binance. Definitely it’s showing that in the very short term most sentiment believes it’s going to be range-bound or weaker.”   BLOOMBERG