Bitcoin just might be the biggest financial story since the election. For a variety of reasons (most of which center around prospects of a much more friendly regulatory environment), BTC futures have rallied more or less nonstop since November 5th, with the December contract reaching a high of $105,325 on December 5 (the June 2025 contract reached a high of $110,935 that day). Any market that rallies that much in such a short period invariably leads to speculation that a bubble is forming. Is this the case for BTC?
Unfortunately, the differences between a bubble versus just an aggressive bull market are subtle and usually reveal themselves only in retrospect. However, there are some factors that usually accompany genuine bubbles. These include:
1. Increasing implied volatility and OTM to ATM volatility skew. As traders rush to buy “cheap” options (in absolute dollar, not implied volatility, terms), they tend to bid up out-of-the-money strikes, increasing the volatility spread to at-the-money options. If the spread grows to abnormal levels, it is sometimes indicative of an overbought, or in the case of a bubble, frantic market. As you can see in the chart below, the spread has been increasing but is not yet at abnormal levels.
2. Sharply backwardated or flattened contango futures curves. Futures curves in which the nearest contracts are more expensive than the deferred are known as “backwardated” (the opposite is “contango”). Each curve exhibits certain behavior during a bubble, as traders tend to bid up the most nearby contracts. As a result, backwardated futures curves tend to become steeper and contango curves become flatter.
3. BTC, which has been in contango since bitcoin futures were first introduced in late 2017, has not displayed either of these effects. During the most recent rally since election day, BTC’s deferred months have significantly outperformed the nearby contracts (see chart below). This could indicate that traders are comfortable with the risk of the deferred contracts and believe that the current rally will be sustained and last into 2025. This would not be the case if BTC were forming a bubble, since they are usually short-lived and confined to the front end of the curve.
4. Unusually high volume and open interest. It’s no surprise that BTC futures have been attracting sharply increased volume and open interest since election day. One interesting point here: the Micro BTC contract has consistently attracted more interest than the regular contract, with its open interest jumping almost 2.5X since before election day. Open interest in the full-sized contract has remained relatively stable. Since the Micro BTC contract is intended for small investors, it appears that these bitcoin futures contracts are attracting more retail than institutional business. Although the increase in volume and open interest has not yet reached extreme levels, the increased presence of retail investors is telling.
5. Presence of related and highly levered financial products. Bubbles are usually accompanied by the presence of various, unusual financial schemes or offers to get retail investors involved. Almost always, they are highly levered and hold the promise of quick double- or triple-digit returns. MicroStrategy (MSTR), the various highly levered bitcoin-related ETFs, and the numerous crypto evangelists on social media all come to mind. Assertions that conventional financial metrics do not apply to the investment or that it is only meant for the few that can truly understand it are other common traits of bubble-like markets.
In each case, there is evidence that the market may indeed be frothy, but not necessarily on the way to a full-fledged bubble yet. In the short run, it appears that BTC will need some new bullish fundamentals or will have to get back over $100K to reignite speculation that a bubble might be forming.