Crypto Futures Open Interest Soars by $1B: Is it Manipulation or a Hedge?

On Sep. 18, the crypto market saw a sudden surge of $1 billion in Bitcoin’s (BTC) open interest on derivatives exchanges, leading investors to wonder if whales were accumulating in anticipation of the unsealing of Binance’s court filings.

However, a closer examination of derivatives metrics showed no clear signs of excessive buying demand, as the funding rate remained unchanged. This decision to unseal the documents was granted to the U.S. Securities and Exchange Commission (SEC), which had accused Binance of not complying with a previously agreed upon consent order related to unregistered securities operations and other allegations.

At the same time, Bitcoin’s price rose by 3.4% to a two-week high of $27,430, pushing open interest to $12.1 billion.

Futures’ buyers and sellers are matched at all times

The surge in leverage demand may have been caused by bullish sentiment as Bitcoin’s price was climbing with the rise in open interest, and then plummeted when 80% of the contracts were closed. However, it is hard to say that Binance’s court rulings were the only reason for this.

No one expected that the unsealed documents would be in favor of Binance or its CEO, Changpeng “CZ” Zhao, since it was the SEC that had requested their release. Also, the Bitcoin futures contract funding rate, which measures the difference between long and short positions, stayed more or less stable throughout this period.

If there had been a sudden demand of $1 billion in open interest, mainly driven by crypto buy the rumor sell, it is likely that the funding rate would have spiked above 0.01%. However, the opposite happened on Sept. 19, as Bitcoin’s open interest increased to $11.7 billion while the funding rate dropped to zero.

As Bitcoin’s price rose above $27,200 during this second phase of open interest growth, it is becoming clear that, regardless of the underlying motives, the price pressure tends to be upward. Although the exact reason may remain a mystery, certain trading patterns may provide some insight into this movement.

Market makers’ hedge could explain OI spike

A potential explanation for the spike in Open Interest (OI) could be the participation of market makers in executing buy orders on behalf of larger investors. This could explain the initial enthusiasm in both the spot crypto market and BTC futures, pushing the price higher. After the initial surge, the market maker would be completely hedged, meaning there is no need for further buying, leading to a price correction.

During the second part of the trade, there will be no effect on Bitcoin price, because the market maker must offload the BTC futures contracts and purchase the spot Bitcoin. This leads to a decrease in open interest and may disappoint some participants who were expecting more buying.

Instead of quickly labeling every “Bart” formation as manipulation, it is better to investigate the operations of arbitrage desks and carefully assess the BTC futures funding rate before making any assumptions. So, when there is no excessive demand for leveraged long positions, an increase in open interest does not always signify a buying spree, as happened on Sep. 18.