Interest in BTC derivatives soars as traders turn to speculation

Bitcoin (BTC/USD), the largest cryptocurrency by trading volume, has been trading sideways with little to no movement after fears of the Fed increasing rates saw the coin plunge in the second week of January.

With BTC hovering between $41,000.00 (£30,138.89) and $43,000.00 (£31,609.08), speculative traders have flooded the market, hoping to make profits by predicting the future price of the cryptocurrency.

As a result, interest in BTC derivatives has surged, with a tag of war ensuing between bulls and bears. Blockchain data and intelligence firm Glassnode disclosed this news in its weekly newsletter published on January 17. While Glassnode is unsure which direction BTC’s price will take in the next few months, it believes the market is primed for a leverage flush.

The analytics firm pointed out that BTC has lost more than 33% of its value since its November 10 ATH of $68,789.63 (£50,574.48). This plunge means people who bought the coin just before it peaked are facing massive losses. Specifically, Glassnode claims 5.7 million BTC (approximately 30% of the tokens in circulation) are underwater, meaning they are worth less than what their HODLers paid for them.

Per Glassnode, this level is crucial historically and psychologically. The company noted that since May 2020, the percentage of BTC supply in profit has always been able to make a comeback after approaching the 70% barrier.

Glassnode added,

The reaction from this level will likely provide insight into the medium-term direction of the Bitcoin market. Further weakness may motivate these underwater sellers to finally capitulate, whereas a strong bullish impulse may offer much needed psychological relief, and put more coins back into an unrealized profit.

Many traders will incur significant losses

With the market showing signs of either breaking out on a bullish or bearish trend, Glassnode believes many people are about to have the BTC they have staked as collateral for leveraged derivative trading wiped out. The company’s data shows that the perpetual futures open interest currently stands at around 250,000 BTC. Reportedly, this is a historically elevated level.

With only two possible outcomes, traders that bet money on BTC’s long-term performance being either bullish or bearish are at the brink of either making massive profits or incurring losses. Considering most open positions are leveraged, Glassnode warns that the BTC futures market will likely experience short-term volatility.

In conclusion, the company said flushing the leverage would result in the stabilization of BTC’s price. However, this stability might come at a price lower than the cryptocurrency’s current level. Glassnode added that the BTC market is nearing a price and momentum equilibrium, and although there are some bullish indicators, bears appear more dominant.

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