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The Growing Dominance of Perpetual Swaps

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Volatility and trading volume continues to compress across the Bitcoin market, as prices remain bound within the $38k to $42k consolidation range. Market prices weakened slightly again this week, trading off a high of $42,893, and losing ground at a weekly low of $38,729.

The market has now traded within an increasingly tight price range for almost three months, leading to historically low yields available in futures markets cash-and-carry trades, alongside a persistent decline in trade volumes. Implied volatility priced into options markets has also broken below 60% this week, which is significantly lower than the 80%+ volatility that characterised much of 2021. Furthermore, transaction volumes on-chain remain muted, albeit with a growing trend of high value ($10M+) transactions, and a macro decline in volumes associated with exchange inflows and outflows.

In this edition, we will focus on a number of these big picture trends that are developing in Bitcoin markets, including:

  • Compressing trade volumes, low implied options volatility, and rolling basis yields persistently below 3% in futures markets. All are leading to a leaking of capital out of Bitcoin markets as investors seek higher returns elsewhere.
  • The dominance of perpetual futures markets continues to grow, as these instruments have clearly become the preferred source of leverage.
  • Declining on-chain settlement volume, however with a growing dominance of large size transactions ($10M+).
  • Cyclical divergence between exchange related inflow/outflow volume, and total transaction volume. This accompanies a potential shift in momentum with respect to network utilisation, and provides a potentially constructive reversal in the fundamentally implied valuation for Bitcoin.

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