Why might the decrease in volume of Bitcoin futures signal the beginning of a new upward trend?

Volume and open interest in Bitcoin futures have been steadily declining, but this could help catalyze the next uptrend.

The volume and open interest of BinBot futures (BTC) are rapidly decreasing. Data shows that since the peak in September, BTC futures volume has fallen by 60% from over $25 billion to around $10 billion.

Bitcoin futures volume by exchange (September)

Bitcoin futures volume per exchange (September). Source: Digital Assets Data

While the decline in business activity may seem like a negative metric, it could also indicate that a bullish cycle is in the making.
Why might the decline in futures market activity drive the price of Bitcoin?

The Bitcoin futures market represents the majority of leveraged trading in the Bitcoin market and popular platforms such as Binance, BitMEX and ByBit offer up to 125 times the leverage.

When traders are highly leveraged, they’re vulnerable to liquidation. For example, if a long-term contract with 10 times the leverage placed at USD 10,000 settles at USD 9,000, it forces the buyer to sell that position in the market.

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Assuming that there are a large number of traders in similar positions, this increases the selling pressure and can catalyze a massive sale on the price of Bitcoin.

If open interest and futures market volume increase, it puts Bitcoin in a vulnerable position and increases the likelihood of cascading settlements like those seen during the disastrous „Black Thursday“ when more than $1 billion in futures contracts were settled when Bitcoin’s price plummeted below $3,600.

The drop in futures volume can be perceived as a potentially bullish event, as normally a small price swing could turn into a significant price change if a large number of settlements are triggered at a certain price level.

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As such, the declining volume and open interest of the futures market could lay the foundation for us to see a stable and prolonged upward run.

Open interest and volume of Bitcoin during bull and bear markets

Open interest and volume of Bitcoin during bullish and bearish markets
During bull markets, there are often multiple spikes in open interest, but the market remains neutral for an extended period, allowing spot volume to recover. As shown in the chart below, while the futures market volume has declined, the spot volume has increased slightly.

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Spot exchange volumes

Volumes of the spot exchanges.

While not shown on the chart, LMAX Digital, a Bitcoin spot exchange that suits institutions, recently surpassed Coinbase to become the largest spot exchange. Kyle Davies, co-founder of Three Arrows Capital, explained:

„Indications that BTC is not a niche craft industry: 1) BTC has a strong correlation with stocks and commodities, but it only trades as a cryptomoney 2) LMAX is the largest BTC spot market in dollars, but you don’t have an account there 3) It trades with multi-billion dollar participants that you’ve never heard of“.

Considering the increase in institutional demand, the increase in spot volume and the decrease in open interest on futures, the current trend can be considered upward.

What do traders expect in the short term?

In the short term, traders expect consolidation to continue below the USD 11,000 resistance and this could extend the declining volume trend in futures.

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Edward Morra, a crypto currency trader, said that the liquidity shows that Bitcoin would probably face more side trades. He said:

„My current outlook is either the local high or another high to eliminate stops. There is a lot of liquidity left below the price.