Risk, leverage, and speculation could be considered the keywords for 2021 as excess cash from covid stimulus entered the stock market and crypto ecosystem. Many traditional financial assets have since returned to their pre-covid levels, such as Ark Innovation ETF, public equities such as Coinbase, and Bitcoin mining stocks making all-time lows. However, Bitcoin is still up around 5x from its covid lows.
BTC, Ark Innovation ETF and Coinbase Price: (Source: TradingView)
The introduction of derivatives was a big part of the 2021 bull run, which allowed investors to take on additional risk, and speculation. One avenue is futures open interest, the total amount of funds (USD Value) allocated in open futures contracts.
The 2021 bull run saw 72% of all collateral used for futures open interest was crypto margin, i.e., BTC. As the underlying asset is volatile, this would add further volatility and risk to leveraged position.
Percent Futures Open Interest Crypto-Margined: (Source: Glassnode)
However, as 2022 approached and risk collapsed, investors used as little as 34% of the margin in crypto. Instead, they moved to either fiat or stablecoin to hedge against the volatility, as either instrument is not volatile by nature. Crypto margin has been less than 40% since the Luna collapse, which indicates risk-off and has stayed flat for the remainder of 2022.
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