The State of Crypto Derivatives

SEP 14, 2021 • 5 Min Read

Disclosure: Delphi Ventures and members of our team have invested in tokens mentioned in this report. This statement is intended to disclose any conflict of interest and should not be misconstrued as a recommendation to purchase any token. This content is for informational purposes only and you should not make decisions based solely on it. This is not investment advice.

Key Takeaways

  • Looking at the global open interest (every exchange, every contract, every strike price), we see a concentration of capital at $50K, $60K, $80K, and $100K. This doesn’t necessarily infer bullish sentiment, as for every ape buying an out-of-the-money call, there’s a seller who believes the option will expire worthless. The same goes for the “anti-apes” buying out-of-the-money puts at $20K and $40K.

  • BTC options open interest is heavily skewed towards the Sep. 24 expiry and the Dec. 31 expiry. Both of these are quarter-end option expiries, which tend to see the most interest. Given this quarter’s options are set to expire in 10 days, higher than normal volatility (compared to the last couple of months) is to be expected.

  • Pivoting to the futures market, leveraged funds trading on CME are net short BTC per CME’s weekly Commitment of Traders report. But this doesn’t really tell us the whole story. The net open interest for these funds hit their lowest level of -30K BTC in Dec. 2020 — just before BTC embarked on it’s journey from $10K to $65K. But net open interest was never positive, peaking at -10K BTC in July.

  • The likely scenario here is that these funds are long BTC on the spot market and hedging their position by shorting futures. In doing so, they earn a basis yield from the difference between the spot price and futures price (which is almost always higher than spot). So when net OI for leveraged funds climbed between Jan. 2021 and June. 2021, the logical explanation seems to be that they were taking profit on their spot BTC and unwinding their shorts to make sure they didn’t have naked short exposure.

  • We can somewhat confirm the above thesis by looking at annualized basis for various futures expiries across exchanges. CME’s traders are institutions, and thus more prudent. Seeing a 5-10% basis opportunity is extremely attractive to them. On the flipside, most traders on Binance or FTX are trying to increase their long exposure to BTC. As a result, we see a relatively lower basis on CME, as basis extraction is the crowded trade on the exchange.

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