Crypto derivatives markets are heating up as Glassnode reports that perpetual open interest has increased in anticipation of a big move late this year.
Perpetual open interest (OI) rose from 304,000 to 310,000 Bitcoin (BTC) as its price briefly touched $90,000 on Monday, Glassnode said on Monday.
The funding rate also “warmed up,” from 0.04% to 0.09%, suggesting that derivatives traders are anticipating a potential market move by the end of the year.
“This combination signals a further increase in leveraged long positioning, as perpetual traders position themselves for a potential year-end move,” Glassnode said.
Bitcoin perpetuals are futures contracts that do not expire and can be held indefinitely. They track the spot price of Bitcoin through a mechanism called the funding rate, which is a periodic payment between traders holding long and short positions.
An increase in the funding rate signals an uptrend
When funding rates rise, it usually means that the perpetual price exceeds the spot price, and more traders are bullish because they are willing to pay premiums to hold long positions.
However, it can also signal potential market overheating, as extremely high rates can indicate long-term debt overhang and possible correction risk.
Bitcoin failed to advance above $90,000 and had fallen back to $88,200 at the time of writing.
Bitcoin perp funding rates have increased recently. Source: Glass knot
Massive End of Year Options Expiration
Market volatility could also be amplified by the massive year-end Bitcoin options expiration event on Friday, December 26.
More than $23 billion in nationally worth Bitcoin options contracts will expire in one of the largest options expiration events of all time. End of term and end of year experiences are much more important than regular weekly or monthly events.
Calls, or long contracts, are clustered around strike prices of $100,000 and $120,000, while puts, or short contracts, are concentrated around $85,000, according to Deribit.
The put/call ratio is currently 0.37, meaning there are many more long contracts expiring than short contracts. The maximum pain, or strike price at which most losses will be incurred, is currently $96,000, according to Coinglass.
If spot prices do not increase, the majority of these contracts will be worthless when they expire. A $7,500 gap from peak pain suggests that bullish bets, or calls for higher strike prices, were too optimistic and would result in losses.
There are plenty of OIs at higher strike prices. Source: Deribit