Cryptocurrency News

Who is faster now? XRP down $ 1, Futures Open Interest Declines 75%


XrpThe price rose 260% in April, from $ 0.57 on March 31 to $ 1.97 on April 14, its highest level since January 2018. The move led to an impressive $ 2.1 billion in XRP futures open interest.

However, on Wednesday, as the cryptocurrency market collapsed, XRP lost 60% in four days, ending the $ 510 million long position. Futures open interest returned to $ 550 million, roughly the same level since early February when altcoin traded near $ 0.40.

Investors are now questioning whether XRP futures will ever recover in the multi-billion dollar market. Was the April figure boosted by excessive leverage, or is it only a matter of time until it returns to previous levels?

XRP Futures Aggregate Open Interest. Source: Bybt

To understand whether the $ 2.1 billion futures market was an anomaly, one needs to analyze the quantity and, more importantly, their premium. This indicator measures the price difference between futures contract prices and the regular spot market.

If some unprecedented uptrend were established, there is a good chance that futures open interest would take months to regain impressive levels previously seen. Not only will traders’ trust take longer to recover, but an exaggerated premium may exacerbate the derivatives markets.

Volume increases evenly, which is healthy

The volume of futures markets indicates whether some unusual events have occurred. By comparing this data with the regular XRP spot market, there should be a clear correlation, and open interest in futures trading would have increased significantly to maintain $ 2.1 billion.

XRP Futures Aggregate Volume (above) vs. Spot Exchange, USD. Source: Coinalyze.net

Although there was a significant increase on 5 April, there was movement with regular spot exchange volumes. In addition, a daily turnover of $ 10 billion in futures markets is more than enough to sustain an open interest of $ 2.1 billion.

Futures premium reached volatile level

To assess whether traders may have generated an unusual open interest based on excessive optimism, one needs to analyze futures prices premiums versus regular spot markets. Three-month futures should typically trade at a 1.2% -2.4% premium or 8% -15% yearly.

Futures contract sellers are essentially postponing trading, so more money is needed to compensate. However, during highly booming markets, the premium can increase by more than 3.8%, which is equivalent to 25% per year.

Binance June XRP futures premium vs spot market. Source: Trading View

June contracts traded around 10% above regular spot exchanges, as indicated above. This is nothing short of spectacular, as it represents a 75% annual premium. However, these levels are completely volatile and benefit immensely from buyers.

Cryptocurrency markets are highly volatile, and no one should bet that no event will repeat itself. However, there are some indications that traders became so confident that they refused to reduce positions even when they were paid 8% or 9% above market level.

Markets exaggerate in both directions

Therefore, there is reason to believe that the current $ 600-billion futures open interest and negative premiums indicate excessive fear and do not reflect the market correctly. XRP prices are up by 294% in 2021, and recent Ripple Labs news In connection with a lawsuit by the United States Securities and Exchange Commission Something is encouraging.

Investors are not wrong to expect that futures open interest will recover the $ 1 billion mark as XRP is above $ 0.80. However, it is unlikely that the market will reach an annual premium of 50% or more, let alone a $ 2 billion open interest anytime soon. It usually takes some time to gain confidence over a long period of time, which is healthy for the other leg.

The views and opinions expressed here are only those of Author And do not necessarily reflect the views of Cointegraf. Every investment and business move involves risk. You should do your research on your own while making the decision.