Derivatives Update: Largest daily liquidation volume in BTC futures in 2022

CME basis see softer reaction to the Monday crash Yields are contracting further in the futures market, with all instruments now seeing premiums near 2%. Following BTC’s push below $28,000 late Sunday, futures premiums began deteriorating, with FTX’s futures trading below spot, while premiums on Binance also narrowed. CME’s premiums were also impacted but stabilized at higher levels and currently trade at a premium to the offshore market. Healthy inflows likely help the relatively stable futures basis on CME into the ProShares BITO ETF. Yesterday, amid the market chaos, ProShares experienced its strongest daily net inflows since November 17th, increasing its CME exposure with 250 July contracts, equivalent to an increased BTC exposure of 1250 BTC. Funding rates stay negative No surprise, funding rates are ticking into negative terrain amid the bloodbath in the market. Funding rates have trailed well below neutral throughout the last seven days and have mostly been negative amid the most recent downfall. The funding rates have been notoriously compressed for a long while, but the open interest in perps remains elevated, as we illustrate further below. We’ve also seen a relatively orderly sell-off when assessing the derivatives market in isolation. Liquidation volumes in BTC reached new yearly highs yesterday, but we’ve not seen see a dislocation analogous to what we saw on December 4th The current market structure with increased contagion risks related to Celsius and the pressuring macro backdrop points in the direction of caution. Yesterday’s large short liquidation volume (illustrated below) might suggest overly confident bears or a forced cross-collateralized liquidation, but given the state of the market, careful spot accumulation seems to be the prudent option if you’re eyeballing an entry. Open interest in perps still elevated around 300,000 BTC The open interest in BTC perps still remains elevated despite the strong sustained sell-off, currently sitting at 298,500 BTC. Yesterday saw relatively volatile development in open interest, with several peaks amid the sell-off, suggesting that some attempted to catch the falling knife. It’s somewhat unsettling to see open interest remaining at such elevated levels. Amid the December 4th crash, the BTC denominated open interest in perps plunged towards 190,000 BTC. Largest daily liquidation volume in BTC futures in 2022 Yesterday saw $340 million worth of longs and $210m worth of shorts being liquidated in the market, leading yesterday to become the most severe liquidation day in the BTC futures market this year. January 21st saw more elevated long liquidation volumes but more soft short liquidation volumes. The surging short liquidations indicate a growing willingness to short with leverage in the market. Unfortunately, Bybit and Binance restricted their liquidation data last year, leading to a dramatic decline in the data quality when assessing this metric, which we highlight in the next slide. 2021 liquidation volumes are not in any way comparable to those of today, and while partly being caused by a reduced risk appetite in the market, the API adjustments of Binance and Bybit play an important role as well. But, do not compare 2021 liquidations to 2022 On April 27th, 2021, Binance conveniently “upgraded their APIs to optimize the User Data Stream”, leading the WebSocket to stop pushing real-time liquidations, dramatically reducing the liquidation data stream provided by the platform. Bybit conveniently followed suit in the obfuscation on September 17th, 2021, restricting WebSocket data to create a “fair trading environment”. These two adjustments have made it impossible to compare 2021 liquidations to the current volumes. However, we may compare and contrast liquidations following the adjustments. Yesterday’s surge in liquidations is the fifth most violent long liquidation day in the market since September 17th, 2021, and interestingly the second-largest daily short liquidation volume, only behind December 4th. Ballooning open interest in ETH BTC futures are not alone in seeing elevated open interest in notional terms. ETH denominated open interest has soared by 35% over the weekend. The ETH denominated open interest in Ethereum futures has soared from 2.4m ETH to 3.3m ETH over the weekend, corresponding to an increase of 35%, before plunging by 400,000 ETH in the next 24 hours. The volatile open interest in ETH might be caused by funds seeking to take advantage of the growing “discounts” to stETH compared to ETH, leading to investors seeking to short Ether futures to hedge stETH exposure. Funding rates plunged well into negative terrain during this surge, suggesting that short traders were the most aggressive, further suggesting hedging activity, possibly related to the stETH discounts.