Summary
- In a five-day period in August, Bitcoin surged by 24.6% while the open interest in Bitcoin-denominated contracts dropped by 12.6%, indicating the rally was fueled by closing short positions rather than new long ones.
- After 361 days of puts being more expensive than calls, the options market shifted, with futures contracts revaluing while long-term contracts remained stable, suggesting a temporary spike rather than a fundamental shift.
- This analysis is based on data from a collaboration between Glassnode and Bybit, covering four crypto-focused platforms and excluding the CME.
According to a recent analysis by Glassnode and crypto exchange Bybit, Bitcoin’s most significant rally in two years was not driven by new bullish investments but rather by the forced liquidation of short positions.
During a five-day span in August, Bitcoin experienced a 24.6% increase while the open interest, which reflects the level of active leverage, fell by 12.6%. This contrast indicates that the price rise was primarily a result of short sellers being forced to close their positions.
Myriad: Predict Bitcoin's next move. Join the discussion.Approximately 64,000 BTC worth of open interest was liquidated during this rally, with short positions accounting for 89% of the total liquidated amount.
The options market corroborated this trend, as puts—contracts that traders buy to hedge against price drops—had been priced higher than calls for 361 consecutive days. This trend was disrupted in a single session, leading to a significant market revaluation.
During this time, Bybit’s volatility index spiked to four times its usual daily range. The immediate revaluation of the front end of the futures curve contrasted with minimal movement in long-term contracts, indicating that the market perceived this rally as a singular event rather than a broader trend shift.
It is important to note that this report is based on data from Glassnode and Bybit, reflecting the situation as of August 23, and only includes four crypto-centric options venues, excluding the CME, thus focusing on the crypto-native trading environment.
Furthermore, the dynamics highlighted in this report are still relevant. Bitcoin surged above $80,000 this week following the Federal Reserve's first rate hike of 2023, which came with a more dovish outlook.
The latest surge led to another round of liquidations, with over $230 million in Bitcoin shorts and a total of $445 million across the broader market being liquidated in just one session. Data from CoinGlass indicated that total liquidations reached around $529 million within 24 hours, primarily from short positions.
The authors of the report raised an important question regarding the sustainability of August's price adjustments. A long-lasting change would be evident through a maintained call-bid skew and a stable front curve. Conversely, if the put premiums return while the funding rates decline, it would suggest that the market absorbed the price spike as a temporary occurrence rather than entering a new market regime.