Blockchain Bites: $10B in Bitcoin Futures, Price Wobbles and Liquidations

Bitcoin topped $34,000 for the first time this weekend and has since seen a double-digital correction in price. The cryptocurrency’s most recent rally came as the Bitcoin network celebrated its 12th Genesis Block day, on Jan. 3 – the anniversary of when the first bitcoin block was mined in 2009.

CBDC experiment
Ukraine plans to launch a digital version of its hryvnia currency on the Stellar blockchain. This is the latest in a series of projects projects from European governmental and institutional players that have sided with Stellar, including a euro stablecoin effort and a tokenized bond pilot from one of the world’s oldest banks.

Red envelopes
Shenzhen is doubling the amount of digital yuan residents can win in a lottery (up to 200 yuan) meant to test its novel, government-backed payments system. The Digital Currency Electronic Payments (DCEP) platform is the most advanced and visible CBDC experiment to date.

Imminent launch
An Ethereum layer 2 scaling solution expects to mainnet on Jan. 15 (The Block). Edan Yago, a Bitcoin developer, argued in a recent op-ed that the rise of off-chain scaling solutions may portent the demise of alternative tokens.

Open interest
Bitcoin climbed from around $19,000 to over $30,000 in the last four weeks of 2020 – a meteoric rise that several industry observers think is likely to continue. Yesterday, the cryptocurrency set a new high of $34,347 before hitting a “much-needed reset.”

As bitcoin ventures out into uncharted territory, many institutional and retail traders are placing bets on its future price. As of Sunday, there is more than $10 billion in open futures contracts all seeking to profit on BTC’s rise or fall. This is a record amount of capital, according to crypto data firm Skew.

Futures give traders the right to buy or sell assets at a predetermined price, at a specified date or within a window of opportunity. They’re a way to gain exposure to a market without necessarily holding the underlying asset. A type of financial product, futures and other options invite institutional players into crypto markets.

As Skew CEO Emanuel Goh told CoinDesk Research Director Noelle Acheson: “In 2020, institutions finally embraced bitcoin but not always in the way one would expect. For instance, sophisticated investors such as hedge funds have been looking at capturing spreads by looking at the inefficiencies of this nascent market. This has translated in particular to leveraged funds positioning of CME bitcoin futures making new record shorts almost on a weekly basis in the last quarter of 2020.”

In fact, last week the Chicago Mercantile Exchange (CME) topped the charts in terms of bitcoin futures open interest, with more than $1.66 billion at stake. CME has become synonymous with institutional crypto involvement. Other derivatives platforms, including BitMEX, OKEx and Huobi are also seeing growing interest.

This influx of capital, coupled with bitcoin’s 24/7, global market infrastructure has led to some far-out speculation. Last week, one of the largest crypto options trading platforms Deribit opened a market allowing people to bet bitcoin will climb to $200,000 by Dec. 21, 2021.

Volatility is the name of the game. As bitcoin tumbled nearly 15% below $30,000 trading yesterday – the steepest since it crossed $20,000 in December – billions worth of futures and options positions were liquidated.

Industry publication Decrypt (citing data from tracking site Bybt) reported over $1.14 billion was liquidated during this price pullback. Liquidations happen automatically when bitcoin’s price falls below a trader’s leveraged position.

As several cryptoratti have already pointed out – bitcoin’s $6,000 drop (and bounce back) was larger than what the crypto was worth at its lowest point last year.