In brief

  • Bitcoin perpetual futures open interest is at a "historically elevated level," according to Glassnode.
  • The underlying signs are showing the market could be ready for a "leverage flush."

As Bitcoin has been busy limboing below the $45,000 mark, crypto derivatives are seeing a lot of "interest" as traders speculate on BTC's future price.

Below the big figures, however, there's a battle brewing between Bitcoin bulls and bears, says Glassnode in its weekly report. And, according to the data analytics firm, it's not clear which direction the price is headed in the next few months—despite the markets being primed for a "leverage flush."

With Bitcoin having lost more than one-third of its value since hitting a record high in November, holders who bought near the peak of the market are now faced with unrealized losses. According to Glassnode, 5.7 million BTC, or 30% of the coins in circulation, are underwater, meaning they're worth less than what their owner paid for them. 

That's an important level historically and psychologically, says Glassnode; since May 2020, every time the percentage of Bitcoin supply "in profit" has dipped close to or below the 70% barrier, it's been able to pull back. 

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Bitcoin supply in profit as of January 2022
Percentage of Bitcoin supply in profit. Source: Glassnode

"The reaction from this level will likely provide insight into the medium term direction of the Bitcoin market," writes Glassnode. "Further weakness may motivate these underwater sellers to finally capitulate, whereas a strong bullish impulse may offer much needed psychological relief, and put more coins back into an unrealized profit."

With a mix of bullish and bearish indicators on hand, it's hard to tell, exactly, which way that will go. But with so much open interest in Bitcoin derivatives markets (that is, the value of unsettled derivatives contracts), somebody's about to get wiped out. According to Glassnode's video report, the hot derivatives market has "set the stage for some kind of leverage flush."

According to its stats, the perpetual futures open interest is at about 250,000 BTC, what it calls a "historically elevated level." Open interest in this case refers to the amount of BTC people have bet on Bitcoin hitting a specific price target (either lower or higher) at any point in the future. (The dollar value of those futures contracts is not historically elevated thanks to Bitcoin's declining price in USD.)

A lot of the situation is due to leveraged trading, as people borrow more than they have to make big trades. The bonus: They can win big if the market moves the way they think it will. The drawback: When the market goes the other way, their collateral is liquidated to ensure the trading platform doesn't get hit with a loss.

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Leveraged trading also leads to volatility, which is why Glassnode calls the current futures markets a "powder keg for short-term volatility."

If that leverage does get flushed, however, expect the price to stabilize for a while, though it might do so below its current price. "There is evidence that the market is reaching some form of price and momentum equilibrium," it writes. And despite some bullish indicators, it says, "Bitcoin bears certainly have the upper hand."

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