The derivatives market is experiencing a notable change in sentiment, driven by rising funding rates and an increase in open interest. A recent report from Bybit, in collaboration with the research firm Block Scholes, attributes this shift to Bitcoin’s (BTC) recent recovery, pushing its price to the upper $90,000 range.

According to analysts, Bitcoin’s impressive rally has been linked to a rise in perpetual futures open interest, along with improved funding rates across various altcoins. This scenario has been documented in various market analyses, revealing futures term structures clustering around similar levels and short-dated options approaching a neutral volatility skew.

Sentiment in the Derivatives Market

Prior to the recent surge, Bitcoin had been trading between $85,000 and $95,000. The breakout above $97,000 resulted in a significant increase in open interest, surpassing $8 billion across nine major cryptocurrencies. As Bitcoin continues to rally, it has positively impacted the altcoin market, with open interest returning to levels not seen since the start of the year when Bitcoin hit $94,000.

Bybit’s Risk-Appetite Index has shown an uptick, indicating that traders are beginning to open perpetual positions to take advantage of any forthcoming price rallies. This positive momentum has also been bolstered by cash inflows into various altcoin spot exchange-traded funds (ETFs), with both Ether (ETH), Solana (SOL), and XRP experiencing multiple days of inflows recently.

In terms of Bitcoin options, the recent price movements have not significantly altered at-the-money (ATM) volatility levels. Although realized volatility spiked towards the end of last week, short-term implied volatility remains relatively low at around 22% for the past 12 months. This trend in the options market is not surprising, as Bitcoin’s price behavior has largely been sideways over the last month.

Will This Positive Sentiment Persist?

Despite the recent positive shifts, there are concerns regarding Bitcoin’s ability to maintain its position around $95,000, which may not be sufficient to sustain a transition from bearish to neutral sentiment. Historical patterns suggest that if Bitcoin fails to hold above the $95,000 mark, it may trigger a return to a put premium.

In conclusion, the current dynamics in the derivatives market appear to be favoring a continuation of Bitcoin’s recent rally, with indications of strong interest in leveraged exposure as evidenced by volatility smiles for shorter-dated options shifting toward a neutral skew from previously bearish positions.