The Death of Institutional Interest in Bitcoin Futures Has Been Greatly Exaggerated

The price of bitcoin has been taking it on the chin as of late, and the bearish and volatile price action has brought out the naysayers in force. But TABB Group discussions with institutions around the long-term viability of cryptocurrencies remain mostly bullish.

The price of bitcoin has been taking it on the chin as of late, dropping in the low $3,000 range earlier this month after breaking through a relatively long-term support level of $6,000. This bearish and volatile price action has brought out the naysayers in force. However, at TABB Group our discussions with institutions around the long-term viability of cryptocurrencies remain mostly bullish. Admittedly, these players are mostly in the market for the long term. One executive noted that his company has been involved in this market for five years and already experienced a dozen bear markets. To many, the recent price action is just a bump in road.

In addition to market sentiment, let’s look at the data itself. For institutional interest in bitcoin futures I like to look to the CME contract, which has a multiplier of five times one bitcoin. The other current offering is from Cboe Global Markets, but that contract represents one bitcoin. Historically, when a market experiences excess volatility, futures open interest and volumes come under pressure as short-term traders take to the sidelines. This exact scenario played out with the CME contract a few weeks ago. The chart below shows the open interest for the CME contract on each Tuesday along with the week-over-week percent change in the spot bitcoin price. Tuesday data is used as that is the data reported to the CFTC for the weekly Commitment of Traders Report.

Data Sources: Yahoo Finance, CME Group, CFTC

The blue line represents the open interest in CME bitcoin futures, while the green and red bars show the weekly percent price change for bitcoin. There are instances where there is a dip in open interest following the excess volatility on this chart. The most recent was just a couple of weeks ago. However, note that the open interest for CME bitcoin futures has always rebounded to higher levels. Hardly the sort of activity we would associate with players abandoning a market.

Another statistic that we can get from the CFTC is the number of entities reporting positions in a certain market. The chart below shows the number of traders reporting CME bitcoin futures positions to the CFTC each week.

Data Source: CFTC

The CME contract had 20 traders reporting positions on April 10, 2018, which is the minimum number needed for a market to appear in the report. As shown on the chart, the total has moved higher over the past six months and now stands at 43, more than a doubling of participants in just six months. Also, note that the line has been flat over the past few weeks. If this truly were a market in trouble, we would probably see participants exiting and that number dropping.

Finally, on a more anecdotal note, more exchanges plan on entering the bitcoin market in early 2019. If this were a market that they felt was losing institutional interest, it is doubtful more competitors would be investing the time and money to enter the market. To borrow from Mark Twain: The reports of bitcoin futures’ death was an exaggeration.

TabbFORUM is an open community that provides a platform for capital markets professionals to share their ideas and thought leadership with their peers. The views and opinions expressed are solely those of the author(s). They do not necessarily reflect the opinions of TABB Group, its analysts, TabbFORUM and its editors, or their employees, affiliates and partners.

Comments

Add a Comment

Your email address will not be published. Required fields are marked *