CME Bitcoin Futures Open Interest Surge Indicates Interim BTC Price Top

Open interest in CME’s standard bitcoin futures contract has increased 35% in four weeks.

Historically, spikes in open interest have marked trend changes in the spot market.

Bitcoin (BTC) futures, offered by global derivatives giant Chicago Mercantile Exchange (CME), are widely known to aid price discovery in the spot market tied to the leading cryptocurrency. New research by McClellan Financial Publication shows sudden spikes in open interest, or the number of active contracts, in these cash-settled futures, hints at trend changes in bitcoin’s price.

Open interest in CME’s standard BTC futures, also known as large futures, has increased by 35% to 19,603 ($3.4 billion) in four weeks, according to CFTC’s Commitment of Traders report. The standard contract is sized at 5 BTC ($173,000) and is considered a bell weather for institutional activity.

The double-digit rise in open interest in a short period means bitcoin’s ongoing uptrend could soon run out of steam, paving the way for a price pullback. The cryptocurrency has gained over 25% in four weeks to trade near $35,000.

“The fascinating aspect of total open interest in bitcoin is that every once in a while, it sees a spike in a relatively short amount of time. When that happens, it nearly always marks a turning point for bitcoin prices. It can be a top or a bottom,” Tom McClellan, editor at The McClellan Market Report, said in an email to subscribers on Friday.

The chart shows spikes in open interest have historically marked trend changes, including the bull market top of late 2021 and the bear market bottom of November 2022.

Taking lessons from gold

Both bitcoin’s recent price appreciation and the surge in open interest likely reflect expectations the U.S. Securities and Exchange Commission (SEC) will soon greenlight one or more spot-based BTC exchange-traded funds (ETFs).

Most analysts expect a U.S.-based spot ETF to bring billions of dollars in new investor money, pushing BTC’s market value skywards.

That said, expected flows may not materialize immediately, leaving the doors open for a post-launch price slide, as observed following the debut of ProShares’ bitcoin futures ETF (BITO) in October 2021. A similar pattern played out in the gold market in the 1970s.

“Speculators are rushing in ahead of that anticipated surge in demand, just as they rushed in ahead of BITO’s approval only to see it top. The same dynamic occurred with gold when it was finally authorized public ownership in 1975,” McClellan said.

Gold prices tanked from $186 per ounce in December 1974 to $110 by August 1976 as the expected rush into the yellow metal did not pan out.

“The lesson here is that those who are chasing into bitcoin now on speculation about the impending ETF approval are likely going to end up like those 1974 gold speculators, and like the earlier bitcoin speculators who topped bitcoin prices as they rushed in ahead of the debut of BITO futures-based ETF,” McClellan added.

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