Historical data shows Bitcoin price drops by 2.3% ahead of CME futures expiry, should traders expect increased volatility? Chicago
Mercantile Exchange (CME) Bitcoin futures and options markets are set to
mature this Friday, leading some traders to fear that the most recent BTC dump is a presage of weakening markets.
According to a September 2019 Cointelegraph and Arcane Research report,
there is typically a 2.3% drop ahead of each monthly CME expiry. Given
the size of the upcoming expiry, it’s worth taking a moment to evaluate
new data to evaluate if these ‘CME drop’ ghosts continue to spook the
markets.
The 2019 study mulls "deliberate manipulation" as a
culprit but aside from that, it did find that 15 out of 20 months had
negative returns for the last 40 hours before CME expiry.
Recent data invalidates the CME expiry theory
By
applying the same methodology as the 2019 study, one can promptly
determine whether the theory still holds true. The CME expiry takes
place at every last trading Friday of each calendar month.
The
study was done by comparing the average price 40 hours ahead of each
event with the previous 40 trading hours. Such a time frame is entirely
arbitrary, although it will be kept to provide a comparison basis.
Bitcoin 40-hour change ahead of CME expiry. Source: Tradingview & CoinTelegraph
The
negative trend observed by the September 2019 analysis persisted
throughout the following couple of months. As the chart above indicates,
November 2019 was a significant outlier with Bitcoin (BTC) posting a 4.4% gain ahead of expiry.
No
other month since the beginning of the study in January 2018 yielded
such a positive number. The previous high occurred in September 2018 as
the cryptocurrency posted a 2.4% gain in the 40 hours ahead of futures
contracts last trading hour.
The BTC halving may have altered the CME narrative
Bitcoin's
third halving was scheduled for mid-May 2020; therefore, November was
six months ahead of the important event. The average 40-hour return for
the past ten months is +0.3%, and that includes September’s negative 5%
performance.
One way of measuring this event's impact on investor
expectations is by analyzing the change in the CME Bitcoin futures open
interest.
This data by itself does not assert whether investors
were bullish or bearish at that time, but growth in open interest
signals new investors' entry or more significant positions.
Either way, this could indicate halving indeed had an impact on such price movements.
CME Bitcoin Futures Open Interest, USD terms. Source: Skew
CME Bitcoin futures open interest grew by 186% to $390 million over from November 2019 up to its May-11 halving.
This
indicates that institutional investors' interest started picking up at
the same time such a 40-hour change indicator started to revert its
negative trend.
The latest data shows $658 million CME Bitcoin futures open interest, as per the above chart.
Contango took a hit after this Monday’s correction
Although
this week’s $400 negative price swing could be deemed irrelevant
considering Bitcoin's staggering 70% 3-month implied volatility, it
certainly dampened professional investors' mood.
The futures
premium, or basis, measures how longer-term contracts are priced
relative to current spot (regular markets) levels. Professional traders
tend to be more active than retail on such instruments due to the hassle
of handling expiry dates.
These contracts usually trade at a slight premium, indicating sellers are requesting more money to withhold settlement longer.
CME Bitcoin futures basis. Source: Tradingview & CoinTelegraph
CME
Bitcoin futures basis briefly touched the unfavorable terrain on Aug.
26, which hadn't occurred since May 25. This movement was in stark
contrast to late July and early August when the basis reached the 2%
level.
It seems premature to ascertain whether this was a change
of trend or a momentary correction as Bitcoin tested the $11,200 support
level.
Futures contracts will rollover
One should keep in
mind that investors typically roll over their futures contracts
position over the last trading days. To carry a long position, one needs
to buy the September contract and sell the August one, thereby reducing
short-term contract open interest.
If these investors decide not
to roll over their positions, this would likely increase the odds of
additional volatility during expiry.
Bitcoin Futures Open Interest, contracts worth 5 BTC each. Source: CME
The
latest data from CME shows an open interest of 4,727 contracts for
August, with each contract representing 5 BTC, amounting to $272
million. If a significant reduction in open interest doesn't occur over
the next couple of days, it could lead to intense pressure for Friday's
expiry.
As for now, the CME expiry ghost seems more like a past
phenomenon which holds little relation to the current state of the
markets.
source link : https://cointelegraph.com/news/non-event-why-fridays-272m-cme-bitcoin-futures-expiry-is-irrelevant
