Looking at the Futures - July 02, 2020

Give me some volatility...

A huge amount of Bitcoin derivatives expired at the end of last week. And you know what? You wouldn’t be able to tell by looking at the price. There is no volatility left in the market. But that might change soon…

Looking at the Futures is a weekly newsletter where we are making sense of the Bitcoin derivatives market. Emphasis is put on the CME products as they dominate the field for institutional investors. But we’ll occasionally look at other venues too.

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I have a pretty ugly chart for you.

Are you ready?

Ok, here is Bitcoin over the past two months. 

I warned you!

I’m pretty sure a bunch of you are having cold sweat just looking at it. Is it bringing bad memories of looking at your phone in the middle of the night just to check on BTC… and see that it went nowhere?

So yes, the June contracts closed in a range bound market. And for Bitcoin that range is pretty tight. On a futures daily close basis we are stuck between $8,800 and $10,000. 

Some people thought that having 35,000 BTC worth of options expiring on the CME — and a lot more on other exchanges overall — would bring some volatility. 

I’ve said that before, I don’t think the Bitcoin derivatives market are directly driving sudden price moves. At least not at this stage. They are mostly passengers strapped for the ride. 

FOMO and whales are what’s moving the market.

And I don’t think there is any FOMO in the Bitcoin market these days. So we are left with whales in the ‘physical’ Bitcoin market. And what happens is that:

  1. Some whale is filling a big order in a short amount of time. 

  2. The Bitcoin market isn’t that deep so the price moves quickly as a reaction.

  3. Highly leveraged traders are caught with their pants down and have to liquidate.

  4. Which creates an even bigger price move.

Then the CME derivatives are playing catch-up.

That might be how we’ll finally be able to get out of this range.

For now we are getting down to levels of volatility last seen in April 2019. Back then Bitcoin was at $4,000. And from April 2019 to July 2019 the price tripled!

There is something we can hope for the second half of the year…

But first we need to get that volatility ramping up. With the current volatility parameters you can run some simulations of the price range for Bitcoin in the near future.

I’ve made some visualization out of it.

To keep is simple, here is a quick guide at reading the chart:

  • For each of the next 7 days you get the probability distribution of where BTC will be (on an end of day basis).

  • So for each day you have a histogram (turned on the side) of where the simulation gives BTC at the end of the day.

  • The darker the colour or the higher the histogram, the more likely BTC will settle at that price.

Conclusion, with the current volatility:

  • The most likely scenario is that we’ll continue being stuck in this range over the next week.

  • But there are reasonable chances we’ll move over $10,000.

  • And a small chance we go back down to $6,000.

Let’s see how that plays out.

Now let’s look at the state of the CME derivatives for the new month. 

On the futures we are seeing the same pattern play over and over for the past 7 weeks. It always starts the same way:

  1. Bitcoin looks like it is moving up fast.

  2. The bulls are putting new positions hoping for the breakout.

  3. No breakout happens after a while.

  4. More positions get closed than have been opened hoping for the move.

And this is how you end up with this downtrend of open interest as more and more traders are giving up. That’s here to last until we get a breakout either to the downside or to the upside.

On the options side we are down to 16,510 BTC worth of open positions. So far no massive inflow of calls or puts spreads. Open interest is pretty much flat.

I mean those kind of positions have been burned hard in April and June so you’d expect big traders to take a wait and see approach.

And you know what? That’s not a stupid approach. The conventional wisdom is predicting that whatever the next breakout move we get it is going to be big. That’s because Bitcoin has been range bound for so long.

But since nobody knows when the big one is coming you don’t want do just buy lots of calls/puts spreads and pray. You’ll get burned by theta.

Instead you can wait for the breakout to happen and just get in on the trend. We’ll see how traders play this one out.

As usual retail investors and the smart money have opposite opinions. As of June 23, that is before the June contract expired, retail went slightly more net long and the smart money was happy to sell to them.

For the smart money the net short is starting to go really really deep…

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