Bitcoin Derivatives Market Shows Signs of Overheating, Further Pain Incoming? (Bitfinex)

Over the last almost two weeks, bitcoin has been experiencing its first meaningful correction since the recovery from April lows. The asset has dropped about 8% from its all-time high (ATH), marking a cool-off period from what analysts at the crypto exchange Bitfinex called one of the sharpest recovery rallies in recent history.

While the cryptocurrency continues to retrace its steps, the Bitcoin derivatives market is showing signs of overheating. This implies that the market is expecting heightened volatility and, possibly, deeper correction ahead, triggered by macro headwinds and structural profit-taking.

Overheating in the Bitcoin Derivatives Market

According to a report by Bitfinex, open interest in the options market surged to an all-time high of $49.4 billion last week, adding $25.8 billion within a few weeks. At some point, the figure was $6 billion higher than the ATH set in January. The open interest of Bitcoin perpetuals also rallied as BTC hit a new all-time high.

“The point here is that the notable uptick in derivatives activity signals expanding institutional participation, and, as it comes in the wake of Bitcoinʼs recent rally to new all-time highs, indicates that market participants are increasingly positioned for elevated volatility,” Bitfinex analysts stated.

Currently, options open interest has plummeted to $39 billion, although mostly due to the May 29 options expiry. However, the high open interest still highlights rising institutional activity and increased hedging following Bitcoin’s recent price peak. Investors are speculating about BTC’s next move, wondering whether it will continue its bullish trajectory or undergo a further correction.

Bitfinex stated that the open interest in Bitcoin perpetuals is one of the catalysts leading to the plunge in prices, as several long positions have been liquidated. Another reason is the aggressive profit-taking by investors over the past week.

Short-Term Turbulence

Despite the level of profit-taking observed, the unrealized profit in the Bitcoin market is currently higher than average, as indicated by the Relative Unrealized Profit metric. This indicator measures the scale of paper profits across the network relative to market capitalization. The Relative Unrealised Profit metric is in a region that has marked the onset of euphoric but short-lived phases in past cycles.

The metric suggests that while BTC could see more upside in the short term, investors are likely to lock in profits by selling, triggering significant volatility. This increases the possibility of short-term turbulence, according to Bitfinex analysts, which can only be offset by sustained demand.

Regardless of the market’s state, BTC remains structurally strong, with significant momentum.