“Okay, so now what?” That was basically what the bitcoin market was saying over the past few weeks. Then a sell-off in the spot market over the weekend triggered several hundred million dollars’ worth of futures liquidations that helped to send prices plummeting further.

Ever since the massive rally culminating in the all-time high of $68,990.90 on Nov. 10, prices came down and stayed south of $60,000 over for the most recent couple of weeks. Some of the hype, it seems, was related to the bitcoin futures exchange-traded fund (ETF) launch, and the subsequent letdown seems likewise to reflect a market that doesn’t know what to do next.

Look at the ProShares Bitcoin Strategy ETF (BITO), which hit the market Oct. 19. Within two days, assets under management (AUM) reached $1.2 billion and spot bitcoin was up over 50% from the previous month.

Anticipation had been building for several weeks that the U.S. Securities and Exchange Commission (SEC) was going to allow some sort of a bitcoin-based ETF to start trading, which it did on Oct. 15.

And then … meh.

The first bitcoin futures ETF’s AUM was valued around $1.4 billion as of Friday. That’s roughly how much it was when bitcoin prices peaked. What’s interesting to note is that the number of shares in the ETF, which trades like a stock, has grown steadily since launch with only a couple of net declines. On Oct. 21, it was just shy of 30,000 shares while now it’s a little less than 40,000.

That tells us there was a growing interest in holding bitcoin, but it wasn’t gangbusters like it was a couple of months ago.

Perp walk

Even open interest (OI) in dollar terms on the perpetual futures market, which began taking off at the end of September when rumors began percolating about the SEC’s ultimate move, was gently coming down prior to the weekend’s plunge. Reaching a high of $26.6 billion on Oct. 20, open interest was at about $22 billion by Friday.

Perpetual futures are very short-term futures contracts (settling as quickly as 8 hours, if not sooner) that let traders take massive leveraged bets of as much as 100x on short-term price moves.

There was one knot in the data, though. On Nov. 26, just about all markets tanked as concerns about the new omicron variant of COVID-19 arose. That was a global market “risk off” day and liquidations of long positions didn’t help bitcoin prices either. Nor did it help that the CME’s bitcoin November futures contract expired that day.

Total open interest fell below $19 billion as bitcoin prices came down about 9%. Yet rather than staying there, bitcoin rebounded, as did the value of open interest. The $200 million in liquidations (according Skew) on Nov. 26 wasn’t even the most in November. And then this weekend came.

November was kind of dull when it came to liquidations so if anything needed to be cleared out, it was going to cause some damage.

In bitcoin terms, open interest remained steady – and high. That signaled many borrowed to take on their positions and those positions were still outstanding when this weekend’s sell-off took place.

“The bitcoin denominated OI has now remained above 365,000 BTC for more than a month,” the analysts at Arcane Research wrote in their weekly report on Nov. 30. “It is not common to see such a high OI being sustained for such a long duration. This could suggest that the market is currently oversaturated with leverage.”

High open interest in bitcoin terms did not lead to any sudden volatility spikes until this weekend. That’s because since May, the percentage of coin-margined futures contracts open interest has been on the decline and fell below 50% in October. Coin-margined futures tend to compound losses during market downturns, leading to more liquidations and deeper price drops.

ETFs and the overall market

The bitcoin futures ETF may have moved prices upward for a moment, but it hasn’t reached a scale large enough for sustained impact, according to Matt Hougan, chief investment officer at asset manager and ETF provider Bitwise.

“We’re not seeing continual inflows to make that ETF or broader bitcoin futures ETFs really systemically important,” Hougan told CoinDesk TV’s “First Mover” program on Wednesday, “If that had continued to grow to be a $2 billion, $5 billion or $10 billion product, it may have started to impact the futures market more, but a billion dollars or so I don’t think is having a huge impact.”

On the other hand, these bitcoin ETFs are not necessarily something to dismiss for the long term.

“The fact that an ETF exists has helped bring more institutions to the table,” said Hougan.

Bitcoin exits Snoozeville

It was a boring market over the past couple of weeks leading up to Saturday, notwithstanding the post-Thanksgiving selloff.

To be sure, leverage was relatively high, as witnessed by the size of open interest. But it was not skyrocketing. Nor was it plummeting. Spot volumes were steady for weeks. Prices were in the $50,000 range, a level which would have seemed like a fever dream a year ago.

That isn’t to say a large liquidation event was impossible; of course, it could happen and it did.

Implied volatilities for one-month expirations with strikes prices similar to spot (“at-the-money”) on Deribit, the world’s largest bitcoin options exchange, had been averaging 77% since August, with occasional spikes to as high as 85%.

Implied volatilities give a sense of the market’s anticipation of the standard deviation in prices. It’s solved by inputting several factors into an options model, so the higher the option price, the higher the implied volatility, all things being equal.

While implied volatilities of 80% would be a sign the end could soon be nigh in any other asset class, that’s not the case in crypto. Nonetheless, it has been range bound for months. It’s as if the market was saying, whatever, this is fine. Even with Saturday’s spot price decline, implied volatilities of 1-month at-the-moneys briefly peaked at around 98% before returning to roughly 82% a couple of hours after.

Option traders were expecting continued dull price action in bitcoin and even in ether options, especially relative to what’s happening in the alternative cryptocurrencies (altcoins). “Position-wise we continue to be heavily short vols in BTC and ETH against long vols in the alts,” Singapore-based QCP Capital said in a Telegram broadcast last week.

Prices had to move

Bitcoin needed some sort of exogenous catalyst. With leverage (in the form of perpetual futures open interest) at lofty levels, volumes fairly tame and implied volatilities stuck near 80%, Saturday’s sell-off took place in what seemed like a complacent but delicate market. After all, conditions like that usually set the stage for a big move in one direction or the other.