The cryptocurrency market is off to a strong start in 2023, with major cryptocurrencies such as and gaining over 30% year-to-date. Growing institutional participation supported this strong performance, as indicated by CME Bitcoin futures open interest, which jumped 21%, near all-time highs.
The resurgence comes after a 10-month downtrend in institutional holdings, which apparently ended with the collapse of cryptocurrency exchange FTX in November last year.
Institutional investors are making a comeback
The Chicago Mercantile Exchange (CME) group is one of the largest derivatives exchanges in the world offering futures and options trading services in industry segments such as stock indices, currencies, real estate, commodities and cryptocurrencies. Typically, a spike in cryptocurrency-related trading volumes on the platform suggests an influx of institutional investors into the digital asset space.
Interestingly, cryptocurrency’s strong rally this year has been supported by growing institutional participation in BTC futures, according to data from Arcane Research. Total open interest for BTC futures currently sits at 21% on the CME, which has only been higher on two occasions: in October 2021, when the first bitcoin-linked ETF was launched, and in late December 2021 .
Cryptocurrency trading volume on the CME first experienced a short-lived rally in November of last year following the collapse of FTX. At the time, institutional investors began taking advantage of the cryptocurrency bloodbath to short bitcoin. However, the volume of crypto derivatives has declined sharply in the last month of 2022.
When bitcoin rebounded earlier this year, total open interest on the CME also started to gain traction. According to Arcane, the boost comes as investors began buying the deeply discounted GBTC and hedging through CME futures after Genesis revealed Gemini had sold 30.9 million GBTC shares during its bankruptcy filing. The report says:
“The CME rally in January, on the other hand, was accompanied by strong markets. BTC is up 36% this month. CME futures started trading at a slight premium to the spot market and returned to contango. And active participation, defined as non-ETF assets, is driving the recent wave.”
Bitcoin open interest, or the value of all open positions in bitcoin derivatives, has dropped by 255,000 BTC in the past three months. “While the decline in FTX partly explains the decline in OI in offshore markets, we see that open interest has trended significantly,” Arcane said.
As noted, bitcoin open interest is down more than 25% this year. Similarly, aggregate offshore open interest is down 18.6% since November excluding FTX data. However, this is in stark contrast to CME’s open interest, which is up 23.6% since FTX’s fall. Arcano noted:
“The different trajectories were especially pronounced in early January as offshore OI declined significantly due to multiple short selling, while the CME maintained robust growth undisturbed by similar dynamics.”
CME futures have been hit hard by the cryptocurrency winter
CME’s cryptocurrency trading volumes fell sharply last year amid a cruel cryptocurrency winter that saw an estimated $2 trillion of value evaporate from the cryptocurrency market. Nearly all major cryptocurrencies, including Bitcoin and Ethereum, have lost more than 70% of their value since their all-time highs.
In December 2022, total crypto derivatives volume on the CME fell 49.2% to $14.2 billion, according to CryptoCompare, the lowest level since October 2020. Bitcoin futures volume fell by 48.3% to $13.2 billion and Ethereum futures volume fell 55.3% to $481 million. The report states:
“Options trading on the exchange also declined significantly in December, with BTC options trading volume declining 57.4% to $225 million, the lowest figure since July 2021. ETH options trading volume was also on the CME fell 41.5% to $2.00 million, recording the lowest volume in its history.
The collapse in derivatives volume comes on the back of a decline in spot trading volumes across the sector, particularly on centralized exchanges. In the final month of 2022, total cash trading volume fell 48.4% to $544 billion, the lowest figure since December 2019.
In total, the cumulative trading volume on centralized exchanges decreased by 46.2% in 2022, according to another report from CryptoCompare. The report cited falling cryptocurrency prices and declining volatility as key factors impacting lower trading volumes.
Meanwhile, cryptocurrency prices have entered a plateau in recent days after rallying over the weekend. Bitcoin is trading around $22,600, almost unchanged over the past day. Ethereum, meanwhile, has lost more than 4%, dropping to around $1,500.
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