The total cryptocurrency market value has climbed back above $3 trillion for the first time since January. The rise comes after a strong rally in Bitcoin, which has lifted the broader digital asset market. But the rally is also bringing more leveraged trading into the market. This could make crypto prices move sharply in either direction if traders start closing their positions quickly.
US spot Bitcoin exchange-traded funds recorded $999 million in net inflows on Monday. This was their biggest single-day inflow since October 6, when Bitcoin was trading around its record-high period above $126,000. Perpetual futures are crypto contracts that do not have a fixed expiry date. They are one of the biggest parts of crypto trading by volume. Traders use them to bet on whether Bitcoin and other tokens will rise or fall. That makes perpetual futures an important measure of how much speculative activity is in the crypto market. Spot trading refers to actual buying and selling of Bitcoin rather than leveraged derivatives positions. But if leverage grows faster than spot demand, the market can become more unstable. The rally is not happening only in the derivatives market. Institutional demand for Bitcoin has also increased. The ETF inflows suggest that some investors are also buying Bitcoin through regulated investment products.
Because these contracts can be traded with leverage, they can increase both gains and losses.
“The main thing to watch is leverage running ahead of spot,” said Caleb Lin, senior sales trader at QCP Group, according to Bloomberg. Lin said rising perpetual futures open interest can be healthy when actual spot demand is also rising.
Open interest in perpetual futures across cryptocurrencies has climbed to almost $160 billion. She warned that the next 5% move in either direction could happen faster than traders expect. Bitcoin fell to about $85,100 on Tuesday. It had jumped almost 8% during the US trading session on Monday. Bitcoin reached $87,381, its highest level since January.
Coinglass data showed the rise in open interest. Open interest measures the total value of futures contracts that are still open. A rise in open interest means more traders are holding active positions and taking on exposure to future price moves. The pullback highlights the risk of a sharp reversal after such a fast rally.
Because positions are being replaced almost immediately, according to Bloomberg, she said this rally is different.
“A squeeze normally destroys open interest,” said Rachael Lucas, an analyst at BTC Markets. Traders are chasing the price move instead of reducing their risk, according to Lucas.
This is the highest level since late October last year.
