Futures market update - Week 16: Futures basis sliding towards 1-year lows

After a promising end of March, sentiment has seen a radical reversion towards despair in the futures market. Driven by BTC revisiting the $30,000s and the pressuring sell-off in the equity markets on the backdrop of growing uncertainty. The average futures basis in the offshore futures market (all crypto futures exchanges except CME) reached 2.02% on Sunday and remained low at 2.12% on Monday. The basis has only reached similar lows on two prior occasions in the last year. On July 20th, prior to the summer short squeeze, and on February 28th. The July low coincided with the market bottoming, whereas the February low was followed by more consolidation in BTC. In general, the futures basis has been far less volatile now compared to last summer. The bottom in July came after significant demoralizing liquidation flushes enticing active retail traders to gain back their losses through shorting. On the contrary, the last 6 months have seen a constant, less intensive downward decline in the basis, accompanied by few noteworthy liquidations. Less action is likely attracting fewer vigilant retail traders and less stupendous attempts to regain its losses. Also, the institutional market sees bleeding futures premiums As already mentioned, the futures basis in the offshore market reached unusually low levels this weekend. Similar dynamics unfolded on CME, leading CME’s 3mth basis to close at 1.1% on the Friday close. The futures-based ETFs are once again in a rolling week, which could lead to a compressed 1mth basis in the coming week. The futures premiums have seen a slight growth early this week but remain at extremely low levels. Leverage is back: Open interest in BTC perpetuals approaching yearly highs The open interest in BTC perpetuals is currently near a one-year high when denominating in BTC, after climbing steadily since early March, with more intensive growth in recent days. Currently, the open interest sits at 256,000 BTC. This is the second-highest daily OI recorded in the last 365 days, only surpassed by Jan 4th. Binance remains the biggest contributor to the open interest in perps by far and has been a significant contributor to the surge in the last few days. This comes on top of a global Binance long/short ratio slightly above 2, which is relatively common terrain on Binance and not necessarily a concern. Also, Bybit and FTX have contributed to the recent lift. All growth in late April has been accompanied by substantially negative funding rates (next slide), suggesting that shorts are the key aggressor while also implying some capitulation from longs after this leg downward. Overall, the growth in the perp OI is worth monitoring with a close eye. As leverage is building, more aggressive moves in either direction could follow. The sentiment, funding rates, and futures basis suggest that shorts are the most confident. Thus, a short squeeze is possibly on the table. Funding rate regime remains neutral to negative Sentiment in perps also worsened over the last week, leading to funding rates to push into slightly negative levels. The average funding rate on Binance and Bybit reached its lowest level since March 10th on Thursday as BTC fell below $40k again. In sum, the sentiment in bitcoin derivatives is still very poor, while the perp OI is edging higher.