The Chicago Mercantile Exchange (CME) bitcoin futures and options markets mature on Friday, leading some traders to fear that the recent bitcoin discharge heralds weak markets.
According to a Cointelegraph and Arcane Research report released in September 2019, there is typically a 2.3% decline before each monthly CME expiration. Given the magnitude of the drift ahead, it is worth taking the time to review the new data and assess whether the spirits of “CME decline” continue to raise market concerns.
The 2019 study looked at “deliberate manipulation” as the culprit, but found that 15 out of 20 months had negative returns within the 40 hours before the CME expired.
Current data invalidate the CME sequence theory
Using the same methodology as in the 2019 study, it can be determined whether the theory is still valid. The CME expires on the last Friday of each calendar month.
The study was conducted by comparing the average price 40 hours before each event with 40 previous trading hours. Such a time frame is quite arbitrary, although it is kept as a basis for comparison.
The negative trend observed in the September 2019 analysis continued for the next two months. As can be seen from the graph above, November 2019 was a massive event as Bitcoin (BTC) saw a 4.4% gain before it expired.
No other month since the study began in January 2018 has shown such a positive number. The previous rally took place in September 2018, when the cryptocurrency saw a 2.4% gain in the 40 hours leading up to the futures contract’s last hour of trading.
By halving BTC, CME may not be listed
The third half of Bitcoin should take place in mid-May 2020. So November was six months before the important event. The average return of 40 hours over the last 10 months is + 0.3%, and this includes a negative performance of 5% for the month of September.
One way to measure the impact of this event on investor expectations is to analyze the change in open interest in CME Bitcoin futures.
This data does not by itself confirm whether investors are bullish or bearish at this point, but the growth in open interest suggests the entry of new investors or more significant positions.
In either case, this could indicate that the halving actually had an impact on price movements.
CME Bitcoin’s future open interest rose 186% to $ 390 million from November 2019 and halved on May 11.
This suggests that institutional investor interest began to rebound at the same time as the 40-hour change index began to reverse its negative trend.
The latest data shows open futures rates of $ 658 million on CME Bitcoin as per the graph above.
Contango had a great success after the correction on Monday
While the negative $ 400 rise in price this week might be considered irrelevant given Bitcoin’s impressive 70% implied volatility of 70% for 3 months, it has definitely dampened sentiment among professional investors.
The futures contract premium, or base, measures how long-term contracts are valued relative to current levels (normal markets). Professional traders tend to be more active than retailers with these tools because expiration dates are difficult to manage.
These contracts usually trade at a low premium, which indicates that sellers are charging more money to withhold settlement for a longer period of time.
CME Bitcoin futures briefly impacted unfavorable terrain on August 26, which had not occurred since May 25. This move was in stark contrast to late July and early August, when the base hit the 2% level.
It seems too early to determine if this was a change of direction or a temporary correction when Bitcoin tested the USD 11200 support level.
The futures contracts are posted
One has to keep in mind that investors typically execute their trades in futures contracts during the last few days of trading. To get a long position, one must buy the September contract and sell the August contract, which reduces the open interest of the short-term contracts.
If these investors choose not to transfer their positions it is likely to increase the likelihood of additional volatility during the expiry.