Gold plunges and Bitcoin collapses, but institutional bullish sentiment remains high

Yesterday morning, the price of gold, which had been rising all the way, suddenly "turned around" and plummeted, ushering in the biggest drop in 7 years! Driven by the collapse of gold prices, other precious metals also fell. At the same time, Bitcoin was not spared, and the price once approached $11,000 from around $12,000.

However, as the price of Bitcoin continued to fall, CME's Bitcoin futures open interest hit a new high of US$841 million, further highlighting the growing interest of institutional investors in Bitcoin.

Of course, this figure alone cannot be used to conclude that Bitcoin will continue to rise in the future, but it does show that professional investors' interest in Bitcoin continues to grow at an astonishing rate.

Contango provides more useful data

The best way to gauge investor sentiment towards futures contracts is by measuring their premium relative to the market price of Bitcoin on spot exchanges. Typically, for a 1-month contract on CME futures, this indicator should show a premium of 0.5% to 1%.

On the other hand, excessive premiums will also create arbitrage opportunities, as one can sell futures contracts and simultaneously buy the same amount of spot in the spot market. This is a market-neutral strategy often referred to as "spot holding arbitrage."

From the above chart, we can see that since mid-March, CME's Bitcoin futures basis has remained at a relatively favorable level, and has maintained a premium level of more than 1% for ten consecutive days.

Positive basis and premium levels mean that sellers need to pay more to delay closing their positions.

This situation is known as contango and is a leading indicator of a healthy and bullish derivatives market. This is especially true when open interest is increasing, as in these ideal circumstances, new positions are being created.

CME also launched Bitcoin options contracts in January this year. However, compared with the current leading Bitcoin options exchange Deribit, CME's Bitcoin options trading still looks relatively modest, but it still reached an impressive $440 million in open interest in late June.

At present, the open interest of Bitcoin options at CME is still $171 million, and it is mainly concentrated in call options. Bitcoin options contracts at CME expire on the last Friday of each month, so we can see in the figure that the open interest will drop significantly on that day.

As it currently stands, 66% of CME’s open interest will expire on August 28, with another 14% set to expire in late September.

CME Bitcoin options also sent a bullish signal

Call options are usually associated with bullish strategies. Of course, there are also some "covered options", which are relatively neutral and can generate fixed returns as long as the underlying asset remains above a certain threshold.

The best way to distinguish call options for market neutral strategies is to monitor whether the percentage of open interest is well below the current market level.

Finding this difference is critical to properly gauge whether call options are used primarily for bullish or neutral strategies.

From the above chart, we can see that CME Bitcoin options contracts have no trading volume below the $10,000 level. Of the current $171 million in open interest, 80% are call options, which is another bullish indicator.

From a larger market perspective, the current total of 44,700 BTC open contracts in the entire Bitcoin options market are below $10,000, totaling $514 million. This figure only accounts for 28% of the total open contracts of $1.84 billion in the entire market, which also shows that the entire Bitcoin options market is currently bullish, which is consistent with the results shown by CME data.

Focus on the present, not the past

By monitoring the derivatives markets, one can gauge the sentiment of professional traders and better assess where Bitcoin is headed in its current trajectory.

Although Bitcoin has failed to break through the $12,000 resistance level and is testing the $11,150 support level, the current Bitcoin futures and options markets are sending bullish signals, which is more optimistic than the market in August 2019, when Bitcoin failed to break through the $12,000 resistance level and fell 20% in the next five days.

So, when Bitcoin plummeted again last night, many investors wondered whether last year's situation would happen again, which is indeed a reasonable concern.

But fortunately, for now, from the perspective of the Bitcoin derivatives market, the outlook is still bullish so far.