Bitcoin rally fueled by record open interest in derivatives market

by James · March 22, 2023

Bitcoin (BTC), the largest cryptocurrency in the market, had traded within a narrow range of $27,800 and $28,300. However, it has now broken out of this range and is regaining strength, even as investors await the outcome of the Federal Open Market Committee (FOMC) meeting.

Regardless of how the FOMC meeting may affect Bitcoin, the options market has been instrumental in driving the positive price action during the current rally. The surge in demand for Bitcoin options has created strong market sentiment, fueling the uptrend that has seen BTC’s price increase by over 30% since mid-March.

The remarkable increase in open interest in Bitcoin options, which represents the total number of options contracts, has indicated a growing demand for BTC options products since the beginning of the rally.

Why is Bitcoin in high demand?

Recently data from Deribit, a derivatives exchange, reveals that open interest in Bitcoin options has hit an all-time high. This indicates an increase in outstanding contracts, suggesting that more investors are using Bitcoin options to gain greater exposure to the cryptocurrency market.

The chart above shows that total nominal open interest in the cryptocurrency market has passed $20 billion, with Bitcoin accounting for $12.5 billion and Ethereum options accounting for $7.55 billion.

Open interest in the options market last exceeded $20 billion in October 2021, indicating a significant increase in demand for cryptocurrency options products in recent months. This has fueled the ongoing upswing in the industry, which has helped overcome the difficult period of crypto winter and the FTX collapse that spooked investors.

The growing interest and activity in the cryptocurrency derivatives market, as evidenced by the increase in open interest in Bitcoin options and the total theoretical open interest in the market, directly affects Bitcoin’s price. In addition, this increased interest and activity may attract more participants to the market, increasing liquidity and increasing the prices of the major cryptocurrencies.

BTC Continues Bull Run

Despite the uncertainty surrounding the FOMC’s interest rate decision, Bitcoin is trading at $28,700, having gained over 2% in the past 24 hours. While many analysts have already priced in the Fed’s expected rate hike of 25 basis points, research firm Blofin notes that only weekly implied volatility remains uncertain and has already begun to decline. Meanwhile, investors maintain a neutral-bullish stance.

Bulls need to maintain a position above the $28,600 resistance zone to validate the new bull cycle. If Bitcoin can end the day with a robust upward price movement and surpass $28,750, the largest cryptocurrency in the market is likely to reach the $30,000 level in the near term.

Overall, the increase in open interest in Bitcoin options shows the growing maturity of the cryptocurrency derivatives market, as more traders and investors seek to gain exposure to Bitcoin and manage risk using these products.