By Vildana Hajric
Bitcoin perpetual futures, one of the most popular derivatives contracts in crypto markets, are increasingly driving the largest digital token’s price.
That’s according to Conor Ryder, research analyst at Kaiko, who points out that the Bitcoin perpetuals-to-spot-volume ratio is at its highest in nearly two years. Perps, as they’re sometimes known in industry parlance, don’t expire and have been hugely popular with traders as the derivatives market is a place where a lot of speculation can occur, according to the researcher.
“It’s a question of price discovery i.e. where the true price of an asset is actually determined. That is historically correlated with volumes, so wherever the majority of volumes are, the more influence that has on price,” Ryder said. “Perps have a larger share of volumes compared to spot, and the theory is that more and more price discovery is happening in perp markets, with long/short pressure having more of an influence on prices.”
The perpetual contract was first introduced by crypto exchange BitMEX in 2016. Exchanges use the so-called funding rate — or the cost to trade — to tether the contracts to their underlying spot price. When the rate is positive, those who hold long positions are paying interest to investors who are short, and vice visa.
When Binance, the largest exchange, last year introduced zero-fee trading for certain trading pairs, spot volumes shot higher. However, volumes have dropped off since the company decided to do away with a majority of the program. In the meantime, perpetuals futures have commanded more of the market, seeing six times the volumes versus spot markets, Ryder estimates.
As an example of how derivatives can be a force on prices, Kaiko points to a “huge” buildup of nearly $2 billion of open interest for Bitcoin futures in mid-April. That came amid positive funding rates.
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“We can conclude that speculative long positions drove this rally and the positive price action seemed to top out as soon as funding rates flipped negative,” Ryder said. Meanwhile, he also points to trends in the options market — every spike in April was dominated by calls, which sometimes hit 70% of volumes. Call options give the purchaser of the contracts the right to buy an asset at a set price within a specific period of time.
“As of today, that share is around 60%,” he said, “suggesting continued bullish sentiment among options investors.”