Categories: Bitcoin

Why could a decreasing Bitcoin futures volume signal the beginning of a new uptrend?

The volume of Bitcoin futures and Open Interest (OI) is rapidly decreasing. The data shows that Bitcoin futures volume has fallen 60% from over $ 25 billion to around $ 10 billion since peaking in September. This could signal the start of a new uptrend.

Bitcoin futures volume in September | Source: data on digital assets

While a decline in trading activity might seem like a negative sign on the surface, it can also indicate that a bull cycle is brewing.

Why has activity on the futures markets decreased? hybrid Can Bitcoin Price Boost?

The Bitcoin futures market represents most of the over-leveraged trades in the Bitcoin market, and popular platforms like Binance, BitMEX, and ByBit allow up to 125x leverage.

When traders use high leverage, they are very prone to liquidations. For example, if a 10x long contract placed at $ 10,000 is liquidated at $ 9,000, it forces the buyer to sell the position.

Assuming there are a large number of traders in similar positions, this increases the pressure to sell and could be the catalyst for a massive sell-off in Bitcoin price.

If the open interest and the volume of the futures market increase, it will put Bitcoin in a vulnerable position and increase the likelihood of cascading liquidations, as we saw on Black Thursday in March.

Falling futures volume can be viewed as a potentially bullish event, as often a small price move can become a big one if a mass liquidation is triggered at a given price.

As a result, falling futures market volumes and open interest could set the stage for a steady and sustained rally.

Bitcoin OI and volume in the bull and bear markets | Source: amCharts

In bull markets, the open interest is often increased, but the market remains neutral for a long time so the spot volume can increase. As shown in the graphic below, the volume on the futures market decreased while the spot volume increased slightly.

Spot trading volume | Source: data on digital assets

Though not on the chart, LMAX Digital, an institutional-grade spot bitcoin exchange, recently overtook Coinbase as the largest spot exchange.

Given an increase in institutional demand, an increase in spot size and a decrease in open interest in futures, the ongoing trend could be described as bullish.

What do traders expect in the short term?

In the short term, traders expect further consolidation below the USD 11,000 resistance and this could prolong the downtrend in volume in the future.

Trader Edward Morra says the liquidity suggests that Bitcoin is likely to experience increased sideways trading.

$ BTC
My current outlook is either a local top or another rise to remove stops. Lots of liquidity below the price pic.twitter.com/yz8HxrJmoq

– Edward Morra (@edwardmorra_btc) October 1, 2020