The crypto market is off to a good start in 2023, with major cryptocurrencies like Bitcoin and Ethereum gaining over 30% YTD. Growing institutional participation in Bitcoin Futures has backed this strong performance as indicated by the Bitcoin CME futures open interest, which has surged to 21%, near its all-time highs.
The resurgence comes after a 10-month-long trend of declining institutional participation that ostensibly ended with the collapse of the cryptocurrency exchange FTX in November last year.
Institutional Investors Make a Return
The Chicago Mercantile Exchange (CME) Group is one of the largest derivatives exchanges in the world that offers futures and options trading services in industry segments such as stock market index, currency, real estate, commodities, and cryptocurrencies. Generally, a rise in crypto-related trading volumes on the platform suggests an influx of institutional investors into the digital asset space.
Interestingly, crypto’s strong rally this year has been backed by growing institutional participation in BTC futures, data from Arcane Research shows. The total open interest in BTC futures currently sits at 21% on the CME, which has only been higher on two previous occasions: in October 2021 during the launch of the first Bitcoin-linked ETF and in late December 2021.
Crypto-related trading volume on CME initially saw a short-lived rally in November last year following the collapse of FTX. At the time, institutional investors started taking advantage of the bloodbath in crypto to short Bitcoin. However, crypto derivatives volume suffered a steep falloff by the last month of 2022.
As Bitcoin bounced back earlier this year, the total open interest on CME also started gaining momentum. According to Arcane, the surge comes as investors started to purchase the heavily discounted GBTC and hedge through CME futures after Genesis disclosed that Gemini had sold 30.9 million GBTC shares during its bankruptcy filing. The report said:
“CME’s January push, on the other hand, has been accompanied by strong markets. BTC is up 36% this month. CME futures have started trading at a slight premium to the spot market and have returned into contango. And active participation, defined as non-ETF activity, is behind the recent surge.”
Bitcoin open interest, the value of all open BTC derivatives positions, is down 255,000 BTC in the last three months. “While FTX’s fall explains parts of the decline in OI in offshore markets, we see that open interest has trended significantly,” Arcane said.
As reported, Bitcoin’s open interest has dropped more than 25% this year. Similarly, the aggregated offshore open interest is down 18.6% since November when excluding FTX data. However, this is in stark contrast to CME’s open interest, which has increased by 23.6% since the fall of FTX. Arcane noted:
“The differing paths have been particularly pronounced in early January, as offshore OI has fallen considerably due to several short squeezes, while CME has maintained a robust growth undisturbed by similar dynamics.”
CME Futures Hit Hard by Crypto Winter
CME’s crypto trading volumes saw a steep decline last year amid a cruel crypto winter that saw around $2 trillion worth of value evaporate from the crypto market. Almost all major cryptocurrencies, including Bitcoin and Ethereum, lost more than 70% of their value compared to all-time highs.
In December 2022, the total crypto derivatives volume on CME dropped 49.2% to $14.2 billion, according to CryptoCompare, its lowest level since October 2020. Bitcoin futures volume was down 48.3% to $13.2 billion, with Ethereum futures volume dropping 55.3% to $481 million. The report said:
“Options trading on the exchange also fell significantly in December with BTC options trading volume declining 57.4% to $225mn, the lowest figure recorded since July 2021. ETH options trading volume on CME also fell 41.5% to $2.00mn, recording the lowest trading volume in its history.”
The slump in derivatives volume was in line with a decline in spot trading volumes across the industry, particularly in centralized exchanges. In the last month of 2022, total spot trading volumes fell 48.4% to $544 billion, the lowest figure since December 2019.
All in all, the cumulative trading volume on centralized exchanges declined by 46.2% in 2022, another report by CryptoCompare said. The report cited falling crypto prices and decreasing volatility as key factors impacting the decline in trading volumes.
Meanwhile, crypto prices have entered a plateau over the past few days following the weekend rally. Bitcoin is trading around $22,600, almost flat over the past day. Ethereum, on the other hand, has lost more than 4%, dropping to around $1,500.
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