Futures OI drops as institutions aggressively cut exposure to risk assets

The crypto market experienced a significant decline on Jan. 27, with both the spot and derivatives markets deep in the red. This decline occurred alongside a broader market sell-off triggered by the collapse of Nvidia and chip stocks, which led to a sharp downturn in Nasdaq and other risk assets, including Bitcoin.

Nvidia saw a historic $600 billion market cap wipeout—the most significant one-day loss in stock market history. This drop was triggered by the emergence of DeepSeek, a Chinese AI company that developed a highly efficient, cost-effective model capable of rivaling OpenAI’s ChatGPT. DeepSeek sent shockwaves through the AI and semiconductor industries, as many believed it could drastically reduce demand for Nvidia’s high-end chips, which have been the backbone of AI development for over a year.

Investors, already skittish about stretched tech valuations, panicked, fearing a major shift in AI’s hardware needs. Nvidia, which had been on an unprecedented tear, saw all its gains since October 2024 erased in a single session. The ripple effects extended beyond Nvidia—big tech firms like Microsoft, Google, and Amazon, which have heavily invested in AI infrastructure, also took a hit as markets reassessed the sustainability of AI’s current trajectory.

The market-wide sell-off significantly affected Bitcoin derivatives, most notably futures. Open interest on CME Bitcoin futures dropped from $20 billion to $17.80 billion in two days)

Open interest on Binance Bitcoin futures also significantly declined, falling from $12.6 billion to around $11.3 billion.

Institutional investors, including hedge funds, proprietary trading firms, and asset managers, primarily use CME futures. Institutions tend to aggressively cut exposure to risk assets when macroeconomic risk increases, such as the uncertainty introduced by DeepSeek’s emergence and the Nvidia sell-off. The massive decline in Nasdaq and Bitcoin’s drop below $100,000 likely triggered stop losses and forced liquidations on CME, exacerbating the drop in open interest.

Furthermore, Bitcoin futures on CME are cash-settled, meaning they are settled in USD at expiration rather than through physical Bitcoin delivery. This often results in a more dramatic unwinding of positions during sharp price declines, as institutional players may be forced to exit positions to meet margin requirements.

Binance futures, on the other hand, include a large proportion of perpetual futures, which do not have an expiration date. This allows traders to maintain positions as long as they have sufficient margin, leading to a relatively slower decline in OI.

CME futures have also historically been more tightly correlated with traditional financial markets. Given the steep decline we’ve seen with NASDAQ, institutional investors may have closed their Bitcoin positions on CME as part of a broader risk management strategy.

Such a sharp drop in OI across all platforms clearly indicates deleveraging. A high rate of unwinding leveraged positions usually leads to reduced volatility in the short term. Previous CryptoSlate research found that similar deleveraging events were primarily liquidations rather than a shift in sentiment. This is most likely the case with Monday’s market wipeout, in which case we will see a recovery in open interest in the next week or so.

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