Bitcoin's Bull-Market Pullbacks: Why They've Been Absent in Recent Price Surge

• Characteristics of BTC's Bull Run
• Spot Market's Role in the Bull Run
• Spot and Derivatives Trading Volume
• Leverage and Market Volatility
• Estimations of Leverage Ratio
• Reduction in Leverage in Derivatives Trading
• Shift in Activity and Use of Coins

Characteristics of BTC's Bull Run

The recent bull run of Bitcoin$42,260 -0.64% (BTC) has been marked by stair-step price actions involving cycles of price increases and horizontal consolidations. The run has been majorly spot-led and characterized by low leverage, hence the absence of the typical double-digit pullbacks seen in previous bull markets. Around 50% of Bitcoin's 160% increase this year happened within the past eight weeks. This steady progression of price increases and consolidations starkly differs from past rallies, where 20% or more pullbacks were typical. The absence of these pullbacks this time around could likely be attributed to spot-market buyers' dominant role.

Spot Market's Role in the Bull Run

According to Greeks.Live, a website that tracks options data, the current bull market is largely driven by the spot market. Major derivatives data have been relatively flat, futures premiums have maintained around 10%, and options implied volatility hasn't shown significant gains. This suggests that the current bull market, backed by the news of a forthcoming ETF, is healthy with limited downside, indicating it's likely here for the long run.

A spot market refers to a venue where an asset is traded for direct delivery. Derivatives, which encompass futures and options, derive their value from the underlying asset and are usually settled in the future.

Spot and Derivatives Trading Volume

As per CCData, the trading volume of spot and derivatives on centralized exchanges surged to a new eight-month peak of $3.61 trillion in November. During this time, derivatives' share declined for the third month in a row to 73%. Analytics firm, CryptoQuant, showed that the ratio of Bitcoin's spot to derivatives trading volume increased from 0.05 last month to almost 0.10, indicating heightened activity in the spot market.

Leverage and Market Volatility

Despite derivatives still accounting for a large portion of the market volume, the leverage in the system remains relatively low, aiding the stair-step price progress. Leverage, a double-edged sword that can amplify both profits and losses, exposes traders to liquidations due to margin shortfalls. These forced unwinding processes can often lead to exaggerated bullish or bearish movements, so the greater the use of leverage, the higher is the chance of liquidations injecting volatility into the market.

Estimations of Leverage Ratio

The estimated leverage ratio, determined by dividing the dollar value locked in active open perpetual futures contracts by the total value of coins held by derivatives exchanges, remains near its April low of 0.20, having spiked above 0.40 last year according to data from CryptoQuant.

Reduction in Leverage in Derivatives Trading

Top exchanges, including Binance, now provide 20x or lower leverage in derivatives trading. This allows speculators to establish long positions controlling 20 times the value of their collateral, a significant reduction from the 100x available during the previous bull runs. Lower leverage usage means less susceptibility to downside volatility caused by liquidations, as seen during the 2020-21 bull run.

Shift in Activity and Use of Coins

The activity has now shifted more towards standard futures on the regulated Chicago Mercantile Exchange (CME), where institutions and professional traders seldom use extreme leverage. Derivatives trading on the CME increased by 18.4% to $67.9 billion in November, its highest in two years, according to CCData. CME also outpaced Binance as the largest derivatives exchange, with open interest in BTC increasing by 21% to $4.11 billion. Moreover, the use of coins as margin for trading reached its peak in 2021-22. Currently, cash or stablecoin-margined contracts account for most of the open interest in BTC futures. These cash-margined contracts offer a linear payoff while coin-margined contracts, where the collateral is as volatile as the trading position, pose a greater risk of liquidation.

Edited by Jonathan Stoker