When the price of Bitcoin (BTC) fell 10% to $ 29,150 on Jan. 27, something unusual happened to the Chicago Mercantile Exchange (CME) BTC futures contracts.
When the price fell, these CME Bitcoin futures were trading at a 1% discount on Coinbase, signaling a disorder between the two markets.
Good Morning.
The Bitcoin spot tracked the weekly newspaper almost entirely.
CME Bitcoin Futs are both backward and expired on Friday. That’s all.
– i.am.nomad (@IamNomad) January 27, 2021
Immediately, traders suggested that futures contracts due to expire within 48 hours were responsible for the price drop. Before jumping to any quick conclusions, it should be noted that any short sale requires a buyer (long) of the same size.
Thus there cannot be an open interest rate imbalance. In addition, futures contracts may be extended (extended) for a future date provided the holder has sufficient margin to cover it.
Instead of assuming that a single factor affects the price of Bitcoin, it is better to analyze the intraday movements of both markets (CME futures and spot exchanges).
The futures premium (or base) measures the premium of longer-term futures contracts based on the current spot level (regular markets). Anytime that ad fades or goes negative, it’s an alarming red flag. This situation is also known as backwardation and indicates a bearish sentiment.
CME futures premium. Source: TradingView
These fixed month contracts usually trade at a low premium, which indicates that sellers are charging more money in order to withhold settlement longer. In healthy markets, futures should be traded at an annualized premium of 5% to 15%, also known as contango.
The misalignment between the individual markets could have been caused by lengthy contract liquidations driven by traders with insufficient margins, thin order books or intense price movement ahead of the remaining spot markets.
Therefore, these data themselves do not reveal any cause or consequence. In addition, a similar movement took place on January 18.
CME futures premium over Coinbase BTC USD. Source: TradingView
Notice how the CME-BTC premium has fallen to a negative 1% despite the fact that there has been no apparent volatility in the BTC spot exchanges. It is safe to say that this event was unrelated to the price movement of the market.
A more detailed analysis of the January 27 crash can determine whether the negative CME premium preceded the market volatility.
CME futures premium over Coinbase BTC USD. Source: TradingView
The above data shows that the CME Bitcoin futures premium declined much later in the day instead of acting as a leading indicator. When Bitcoin tested the $ 31,800 resistance, selling pressures on CME continued, causing the current price differential.
This effect could have several reasons. Comparing intraday price across multiple exchanges could therefore explain whether CME led the downturn.
CME BTC futures against Coinbase, Binance Perp, OKEx weekly. Source: TradingView
In summary, it can be said that the CME Bitcoin futures have no price expectation. These markets are incredibly arbitrary and usually move together. In addition, there may be slight variations in the usual premium similar to January 18th, regardless of Bitcoin’s volatility at the time.
The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.
