Institutions return? CME’s BTC futures open interest market share near all-time highs

In the past 24 hours, Bitcoin jumped to $23,500 after falling to a local low of $22,400. It has risen by about 36% since the new year, and ETH has risen by nearly 30%.

Many investors believe that the crypto market has “bottomed out,” and one reason that cannot be ignored is the increased participation of institutional investors. Data from Arcane Research shows that growing institutional participation has contributed significantly to futures market activity.

An important indicator of institutional participation is the open interest (OI) of the Chicago Mercantile Exchange (CME) in the futures derivatives market. CME is a global derivatives market operated by the world's largest operator and is mainly used by institutions for options and futures trading.

According to analysts at Arcane Research, CME’s share of total BTC futures open interest currently stands at 21%, close to all-time highs.

The last time OI was this high was in October and December 2021, once during the launch of futures-based ETFs in October 2021 and again in late December 2021. The crypto market was at the peak of its bull run at that time.

As OI surges, Arcane noted: “While ETF flows remain stagnant, CME open interest is surging. The growth is driven by increased direct activity, as non-ETF contribution to CME OI has grown from 40% to 53% year to date.”

The surge also affected the cumulative trading of BTC futures open interest. However, there were some downturns. For example, BTC stored in offshore exchanges fell by 18.6%, which is explainable because the surge in institutional futures and options trading means that a large amount of funds will leave exchange reserves.

Funding rate remains neutral

Although OI is high, the digital asset research firm noted that it is different from the funding rate. Although the indicator has peaks and troughs, it remains neutral overall.

According to an Arcane report on January 24, the average funding rate on Binance and Bybit exchanges was 0.05%. However, according to Santiment data, Binance’s funding rate had dropped to -0.01% on January 25 as of press time.

Meanwhile, implied volatility, which measures the movement of futures prices relative to realized volatility, a measure of historical price movements, has increased since the start of BTC’s rally.

As implied volatility rises above 60, realized volatility also rises. This means that the gains or losses from price changes increase significantly, but because the slope is positive, the volatility suggests a bullish trend.

Anthony Scaramucci, founder of SkyBridge Capital , is optimistic about the rise of BTC. In an interview with Bloomberg, he said that he expects the Federal Reserve to pause its interest rate hikes before reaching its 2% inflation target, leading to a rise in risky assets.

“I do believe the Fed declares victory at 4% to 5% inflation,” he said. “If I’m right, the market will recover. There will be a lot of short covering in crypto and a rebirth of risk assets.”

Scaramucci, whose investment management firm SkyBridge Capital has about 10% exposure to bitcoin through its SkyBridge Multi-Adviser Hedge Fund Portfolios Series G, said the firm may focus on other assets if the leading cryptocurrency embarks on a bull run.

Scaramucci, who briefly served as White House communications director, is one of the most prominent Bitcoin advocates and has been advising people to scale up their BTC investments appropriately, but not to allocate more than 5% of their total savings.

Mike McGlone , senior macro strategist at Bloomberg Intelligence, said Bitcoin could reach six figures, but the timing of reaching that level remains unclear.

In a Jan. 24 interview with podcast host Scott Melker, McGlone warned investors that Bitcoin’s price could drop to the $15,000 price level before hitting new all-time highs.

He explained: "It's still early in terms of demand and adoption, it's like the internet 20 years ago. In the long run, I think there's still a 'zero' to be added to the price of Bitcoin. It's a matter of time and you should accumulate chips. Be careful with this short-term rally in January, if you bought at $23,000, you could easily have to watch it fall to $15,000 before you see another zero added to the number."

In the short term, Bitcoin's trend is still driven by macroeconomic events. The next big thing investors are paying attention to is the interest rate meeting. The first Federal Reserve interest rate meeting in 2023 will be held on January 31. When the U.S. central bank's monetary policy shifts will have an impact on BTC prices.