Regulatory Woes Weigh on Crypto Price as BNB Futures Open Interest Soars

The recent crypto market has seen a 24.5% dip in the price of BNB over the past 90 days, despite a 7% increase between July 10 and July 11. This has been worse than the overall altcoin market, indicating that the bearish momentum is still present.

It is likely that the correction in BNB’s price is connected to the lawsuit filed by the U.S. Securities and Exchange Commission against Binance and its CEO, Changpeng “CZ” Zhao, on June 5th.

To gain a better understanding of the situation, analyzing derivatives contracts such as those offered by the Gemini crypto exchange can provide valuable insights into the positions of whales and market makers.

Is the recent BNB price rally sustainable?

To assess whether the surge above $245 on July 11 is supported by an improvement in sentiment or a balanced demand for leverage through BNB derivatives, it is important to analyze the open interest in BNB futures markets.

Price is a key metric for understanding traders’ sentiment, but it does not explain all scenarios. For instance, between August 2022 and September 2022, BNB outperformed the crypto market by 19%.

The 90-day negative 24.5% performance may be a reversion to the mean as investors no longer believe the crypto price premium is justified.

Nevertheless, no metric is perfect and one should examine the open interest in BNB futures markets to gain a broad overview of the demand for leverage during the recent underperformance.

BNB futures open interest rose, but is it bullish?

The number of active contracts, or open interest, in the futures markets has seen a marked increase, which is generally seen as a positive sign as it allows institutional investors to participate. Moreover, the surge in BNB futures open interest from $355 million on July 5 to the current $476 million, approaching its highest level in 18 months, is a clear indication of increased trader involvement.

The previous peak in open interest, at $490 million, was on Nov. 5, 2022. Interestingly, the price of BNB had reached a six-month high on that very day, followed by a significant correction of 28% in the subsequent five days.

However, open interest does not necessarily indicate bullish or bearish sentiment among professional investors. The futures annualized premium measures the difference between longer-term futures contracts and the current spot market levels. Ideally, the futures premium, or basis rate, should be between 5 and 10% to compensate traders for “locking in” their funds until the contract expiry. Therefore, levels below this range are bearish, while figures above 10% indicate excessive optimism.

At present, the BNB crypto exchange shows a negative premium, suggesting that short sellers are paying 10% per year to maintain their positions. This is not uncommon for BNB, and similar instances of a negative 10% futures premium occurred on March 17 and April 22, although they lasted for less than a week in total.

In terms of price, March 18 marked the end of a bull run that peaked at $345, followed by an 11.5% correction to $306 over the next 10 days. Similarly, when the BNB futures premium returned from the negative 10% level on April 26, the crypto price declined by 12% in the following 16 days.

BNB short positions may have been used to bypass vesting and lockup periods

Although it is impossible to determine whether there is a direct connection, the data suggests that investors may be utilizing BNB futures contracts to clear out spot order books, potentially resulting in price pumps. Another potential cause of the negative BNB futures premium could be attributed to vesting periods, where BNB holders are restricted from selling their positions yet seek to reduce their exposure.

These restrictions may be due to formal contracts with current or former employees and partners, or due to smart contracts. Consequently, attempting to pinpoint a single party responsible for this strategy is rarely successful.

The derivatives data points to an increased appetite for leverage using futures contracts, particularly by shorts, due to the negative premium. This puts downward pressure on BNB’s price as long as the futures premium remains negative. Although it is uncertain whether the price action will repeat itself, the current derivatives data does not support bullish momentum for BNB.