RiskSwap Analytics: BTC & Open Interest on CME
“Buy rumours, Sell facts.” is a well-known adage among traders that never ceases to be relevant. Today, the RiskSwap team would like to share with you research devoted to the recent BTC price hike that is strongly associated with the launch of ProShares BTC futures ETF. Let’s get started!
Introduction
First, let us simulate the situation in a vacuum. Imagine a calm market where nothing is happening, absolutely still. Since all available information is already in the price, the asset is estimated objectively. Small trading volumes indicate that most traders agree with the current price list.
But, at some point, the first volumes and a tiny price movement begin to appear — suppose that it goes up. Why did this happen? Perhaps a trader, analyst, or a whole team of hedge fund employees found something interesting, or maybe something happened in the world, and the first market players learned this information. They did some research and bought the asset, thus pushing the price up a bit. And then other traders gradually know about it. At first, in personal conversations with friends and partners, the news follows, and an increasing part of the market learns about what has happened or will happen gradually.
Thus, a trend is formed, which we have all seen on the chart more than once. Very often, if an event is known in advance, a situation arises when the entire positive or even a little more, is already included in the price of an asset. Therefore, when the event actually occurs (or even earlier), the brightest players already fix their positions about other market participants, take the money, and fly to rest in the Bahamas. This pattern can be found everywhere in the markets.
Now, let’s look at a similar case for BTC, which has been developing over the past month!
Launch of BTC Futures ETF on ProShares
Since the end of September, the rise of BTC has been accompanied by rumours of the approval and launch of futures ETFs. Indeed, on October 15, no one had any doubts that the ProShares fund would be approved on the 18th.
It would seem that everything is as simple as it was at the end of 2017 with the launch of the Chicago Mercantile Exchange (CME) futures. It’s necessary to recall the proverb from the beginning of the article and simply sell BTC in the middle of October, after which the price should have started to decline, since the smart whales, as usual, are closing their positions on the regular traders buying ETFs.
However, everything did not go according to plan. Now (October 25), the BTC price is at about the same level on October 18.
So what happened? Let’s break it down!
First, you need to understand the mechanics of the BTC ETF. Its underlying asset is not real Bitcoin, but futures traded on CME (it’s called “synthetic replication ETF”), and quite a lot of skepticism was associated with this fact. Many market participants were not very optimistic about the impact of the launch of this ETF on the price of BTC. There is no actual purchase of an asset, you will not be able to get your BTC, which means that the demand from investors will be low.
But, if we analyze the mechanics in a little more detail (but still very superficially), we get the following:
Suppose Uncle Sam buys BITO — the same ETF on BTC. ProShares, the ETF provider, buys futures on the CME (Otherwise, it will have price risks over Uncle Sam). Who is the seller of CME futures? A market maker who does not want to have price risks either! Therefore, he also buys BTC. Where? And this is already a creative question to which we do not know the answer. Possibly through the OTC market, Coinbase, or another platform. In this whole scheme, there must still be a demand for real BTC from the purchase of Uncle Sam, albeit through a chain of intermediaries!
Now you understand how the BTC ETF affects the demand for “digital gold”, and what emotions the market felt before its launch (positive, but with a grain of salt from many participants). Let’s take a look at what happened after the launch of BITO.
The BTC Futures ETF became available for trading on October 19. According to Bloomberg, trading volumes hit the $1 billion mark in just one day, making it the second most popular ETF after the BlackRock carbon fund. The interest in the asset turned out to be higher than the expert forecasts. We can say that the “ICO was successful”. Investor interest is massive, articles in all news agencies. This is also a positive factor that was underestimated by analysts before the launch.
Mass ETF launch & CME Open Interest
Below is a list of BTC funds and their launch dates. As you can see, there are 5 more ETFs in the queue (however, some applications may be rejected), which is also a positive for BTC.
Of course, there will be no such “hype” as when launching the very first ETF from ProShares, but there is a demand from investors who previously could not (or did not want to use more complicated ways) to get exposure on BTC, as evidenced by perhaps the most important Bitcoin ETF metric — CME open interest.
Yellow line — BTC price, blue area — open interest
See the sharp rise in open interest on October 19? This is just the launch of the BTC ETF from ProShares, OI increased by 24.5% over the day. Further, the dynamics of the growth of open interest decreased, but this may be due to the correction of BTC itself (investors are afraid and, on average, are less willing to open positions when the market declines).
Bottom Line
The adage “buy rumours, sell facts” didn’t work with Bitcoin. 7 days have passed since the launch of the ETF, and the price of BTC has not gone lower, while short-term speculators have most likely closed their positions on ETF buyers. This means that the main “concern” of the crypto community has gone off the agenda, and the likelihood of further growth becomes higher! But we can’t be sure, maybe short-term speculators will fix their positions lately, or maybe it’s the end of the local upward trend!
