Bitcoin Open Interest Hits Alarming Level, Brace For Impact?

Data shows that Bitcoin Open Interest has surged to extreme levels recently, a sign that a large amount of volatility may soon clutch the market.

Bitcoin Open Interest Has Been Rapidly Moving Up Recently

As an analyst in a CryptoQuant Quicktake post pointed out, the BTC Open Interest is very high. The “Open Interest” indicator measures the total amount of Bitcoin futures contracts currently open on all derivative exchanges.

When this metric’s value rises, the investors are opening up fresh positions on the derivative market. Since the total leverage in the sector usually goes up when this happens, the asset could become more likely to show volatility after the onset of this trend.

On the other hand, a decline implies the holders are either closing up their contracts of their own volition or are getting liquidated. Generally, the market becomes more stable when leverage declines. Now, here is a chart that shows the trend in the Bitcoin Open Interest over the past few years:

Looks like the value of the metric has been sharply going up in recent days | Source: CryptoQuant

As displayed in the above graph, the Bitcoin Open Interest has recently observed a rapid uptrend as the cryptocurrency price has rallied beyond the $52,000 level.

This pattern isn’t anything out of the ordinary, as sharp price action like the one being witnessed by the asset right now can attract many speculators to place their bets.

However, the current scale of the indicator is worth noting, as all the price surges in the past year failed to ignite such activity in the derivative side of the market.

“Open interest can be a powerful rally driver, but it can also be a clear indicator of overheating,” explains the quant in the post. “In that sense, open interest has been a strong driver of BTC’s price in ’23 and ’24, but it’s now at a level that may be too high.”

The chart shows only three instances in which the indicator’s value has been higher than the latest peak. The first two coincided with the bull rally peaks in the first and second halves of 2021, while the third occurred around the March 2022 top.

As such, the latest high levels of the Open Interest may also be a cause for concern, as they can suggest the market is in a similar state of overheating. Such market conditions are ripe environments for volatile storms to brew, as any sharp swings in the price can cause liquidation squeezes.

On paper, this volatility can take the price in either direction, but going by what happened in all three instances above, the price may be more probable to see a correction.

However, the analyst has also raised another possibility: that the current high Open Interest levels are simply a sign of Bitcoin’s new age: the era of spot ETFs.

BTC Price

At the time of writing, Bitcoin is floating around the $52,000 level, up more than 10% over the last seven days.

The price of the asset has sharply surged recently | Source: BTCUSD on TradingView

Featured image from Jievani Weerasinghe on Unspash.com, charts from TradingView.com, CryptoQuant.com