Weekly Commentary: Derivatives in Demand

Bullish spot price action in October has led to a marked increase in demand for long exposure through futures and perpetual swap derivative contracts. BTC’s future-implied spot-yields lead with a 14% annualised carry for the 1-month tenor, compared to ETH’s lower (but climbing) 12%. Open interest in the perp of each major asset has exploded — to all-time highs for ETH and levels on par with the 2021 run to an all-time high for BTC. The demand for long exposure has driven the price of the perpetual up faster than the underlying spot price, leading to the largest funding rates paid from long positions to shorts that we have seen since November 2021.

Futures-implied Spot-yields

Figure 1 Hourly annualised yields to spot implied by the prices of BTC (yellow) and ETH (purple) futures at a 1- month tenor since 18th August 2023. Source: Block Scholes

• October’s strong, bullish spot price action (and return to prices not seen since the middle of 2022) has had a drastic effect on the futures curves of both major assets.
• BTC has led the long demand through the futures contract, climbing to 14% above spot prices (at an annualised rate) at a 1-month tenor.
• Despite trailing BTC’s at each step (as well as across a number of derivatives metrics), ETH futures have climbed to 12% at an equivalent tenor.

Perpetual Swap Open Interest

Figure 2 Daily open interest in the Deribit-traded, perpetual-swap contract for BTC (yellow) and ETH (purple) since 1st January 2020, measured in US dollar notional value. Source: Block Scholes

• The strong demand for spot exposure through derivatives contracts can also be seen in the open interest of perpetual swap contracts, which track the price of the underlying reference asset.
• Open interest in BTC’s perp has only been higher than October’s levels once — during the first all- time high peak in April 2021.
• ETH’s contract has never seen these levels of open interest.

Perpetual Swap Funding Rate

Figure 3 12-Hourly perpetual-swap funding rate for BTC (yellow) and ETH (purple) since 14th May 2023. Source: Block Scholes

• The demand and increase in open interest in the perpetual swap contracts of both majors has kept the derivative contracts’ prices above those of spot.
• This has resulted in large funding rates paid by long positions to short positions to hold their long exposure.
• Current values are the highest we have seen in over a year but are still far below the incredibly high values observed during the bullish mania in 2021.