2020-September-21

Institutional Investors Turn 'Hodlers' on Bitcoin Futures Markets

Bitcoin, now trading on global markets from local face-to-face trades to the world's largest futures exchanges, has to contend with the reality of catering to both a retail and institutional crowd. But the two market participant groups show completely different characters despite Bitcoin markets seemingly showing similar trends in trading volumes, open interest, price differences, and spreads.

While the term 'institutional investors' can cast a wide net, there is a straightforward metric that separates it from retail demand – regulated exchanges.

In this research, ZUBR delves into the two camps' attitudes during times of high volatility and regular trading. Data analysis shows very critical differences in the trading personas.

Key Takeaways:

• Bitcoin futures trading volumes hit over $4 trillion in the past year. However, most notably is the growth coming from institutional investors on CME and Bakkt, the only two venues that saw an increase in trading volume after May's all-time-high.

• Open-Interest on CME and other regulated exchanges has remained consistently higher in comparison to their traded volumes. This indicates that traders on these venues are increasingly looking at the long-term outlook and aren't very easily swayed by large increases or decreases in price.

• Correlation of traded volume (in terms of daily percentage change) is very similar on unregulated exchanges; however, they differ significantly for regulated Bitcoin products. This again confirms a long-term bias from institutional investors.

• Physical delivery of Bitcoin is becoming more and more critical as Bakkt traders shift their focus from cash-settled to preferring the actual underlying asset.

Cryptocurrency market participants and commentators have always gauged interest and sentiment on the back of exchange-traded volumes. It is a metric used time and time again within the cryptocurrency sphere. Milestones are always touted as success and a badge of honor held by market participants.

Indeed, the numbers are impressive. At the end of August, Bitcoin futures trading volumes broke past the $3 trillion mark for this year alone. One-year trading volumes breached the $4 trillion mark from September 2019 up until mid-September 2020. Average monthly volumes hit $378bn in 2020, nearly 60% higher than the previous quarter average of 2019.

And while fake volumes have previously been a critical problem within the industry, trading volumes, as well as other industry metrics, are now very much linear looking from the top. Trading volume ebbs and flows have moved together across exchanges (see chart 1). Prices now are rarely far from each other.

Such a visible correlation for Bitcoin, which may be considered to be one of the most decentralized assets attracting retail and institutions, is indeed a sign of healthy and market maturation. Without a doubt, this is a long way to have come from what could be seen before Bitcoin catapulted onto the world stage in 2017.

And yet, there are observable differences when drilling further down into the data in how Bitcoin is being traded and by whom.

1: Monthly Bitcoin Futures Trading Volumes (Source: Skew)

Market Sentiment Assessment

The expansion of Bitcoin derivatives has given market participants the ability to gauge sentiment and price discovery better. A key metric in futures is the ability to assess market flows by looking at changes in open-interest.

And both metrics, trading volumes, and open-interest for futures are used as key indicators to assist market participants in assessing whether or not a bull or bear run is either strong or weak (see table above). These are the primary data points used by traders to build their strategies better.
However, market participants are wide-ranging on cryptocurrency exchanges. There are spot markets, futures, options, over-the-counter trusts, and physical trading. Some exchanges cater to specific regions more than others. Some exchanges are regulated, and the majority who are unregulated. Then there are institutional pedigree derivatives such as futures seen on the Chicago Mercantile Exchange (CME) and cash or physically-settled Bitcoin futures from Bakkt. There are retail traders and larger whales.

And data shows they all have different trading characters.

Open-interest to volume ratio's on regulated exchanges, and Deribit (who up until the start of the year was under a Dutch jurisdiction attracting a higher pedigree of traders), shows that on the average, there is more open-interest on the exchanges than there is trading volume at any point in time (see chart 2). On the complete other side of the spectrum is Binance, whose open-interest to volume ratio shows that traders on the platform close their positions much faster by a wide-scale.

The data also shows that in 2020, the ratio has indeed increased (i.e. more open-interest compared to trading volume) on regulated exchanges while retail-geared cryptocurrency trading venues have remained relatively flat year-vs-year.

2: Open Interest / Volume Ratio During in 2020 vs 2019

Such a trend is further cemented when looking at the ratio during bull and bear markets. In 2020, institutional traders and those on regulated exchanges have had a smaller turnover in comparison to their open-interest. In fact, CME traders lead the pack keeping their positions open (see chart 3). And the bear market seen this year didn't deviate much further from the attitude for institutional and hedge traders in comparison to other unregulated exchanges. (see chart 4).

'Black Thursday' was also indicative of the ethos. Bakkt and CME both had the highest levels of open-interest in comparison to traded volume (see chart 5).

3: Open Interest / Volume Ratio During Bull Markets

4: Open Interest / Volume Ratio During Bear Markets

5: Open Interest / Volume Ratio During on 'Black Thursday' (2020-03-12)

Trading Character Correlation

The Open-Interest to Volumes ratio isn't the only metric that shines a light on the trading characters on different trading venues. While the trading volumes trend seemingly move together (as mentioned above), a closer look at the daily changes shows a very different story between regulated products and retail exchanges.

In comparison to Binance, who sits at the top of the table in traded volumes, the daily % change in trading volume is nearly perfectly correlated to that of BitMEX, the latter of which has had a decline in the overall market share of futures markets (see chart 6).

The same can be said for Binance and Huobi (see chart 7). However, Kraken and CME deviate from this norm. And noteworthy is the correlation in daily changes of open-interest where CME again ranks the lowest compared to unregulated trading venues (see chart 8).

6: Trading Volume % Change 30-Day Rolling Correlation with Binance

7: Trading Volume % Change Correlation with Binance

8: Open-Interest % Change Correlation with Binance

9: Open-Interest % Change Correlation with Binance During Bull Market

10: Open-Interest % Change Correlation with Binance During Bear Market

Markings of Future Interest?

As far as dollar figures go for traded volume, the unregulated retail-geared exchanges remain to lead markets. However, month-on-month growth figures tell an essential story. CME only trails behind Binance for average growth for 2020 (see chart 11). Bakkt isn't far behind either. And while May saw the largest traded volumes happen in Bitcoin futures ever, only CME and Bakkt have seen growth since then (see chart 12).

The writings might not be on the wall yet for full-scale institutional interest. But there is a clear long-term interest in the cryptocurrency on regulated exchanges that has not been seen before. And the open-interest to volume ratio is quite telling of this fact.

And with the trading characteristics of each exchange varying from one to another, Bitcoin might continue to see further interest on regulated exchanges as more hedge funds and participants come in. A key component of Bitcoin, however, is the physical delivery of a scarce asset, unlike CME's cash-settled futures.

Bakkt has taken on such a challenge and is proving to be a competitive knock-out. While at the start of the year, cash-settled futures accounted for more than half of Bakkt's total traded volume, August closed off with physical Bitcoin delivery accounting for a whopping 72%.

What is clear, is that regulated exchanges have attracted a different calibre of traders to the market potentially shifting the future dynamic of the cryptocurrency into what believers have wanted all along - displace gold.

11: Average 2020 Monthly Growth for Traded Volume (%)

12: Traded Volume Growth May vs August 2020 (%)

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