Bitcoin Open Interest Is Overheating, Brace For Volatility?

Data shows the Bitcoin futures open interest has risen recently and has reached a territory that has led to volatility for the asset in the past.

Bitcoin Futures Market May Be Becoming Overheated

As explained by an analyst in a CryptoQuant Quicktake post, the BTC open interest has entered the overheat zone following the latest rally in the cryptocurrency’s price.

The “open interest” here refers to the total amount of Bitcoin futures contracts open on all derivative exchanges in the sector. The metric naturally accounts for both short and long positions.

When the value of this indicator rises, it means that the investors are opening up more positions on the futures market right now. Generally, whenever this happens, the overall leverage in the market also goes up, and with leverage, chaos can follow.

Thus, whenever the open interest is at a high enough value, the cryptocurrency price may become more likely to show a high amount of volatility/fluctuations.

On the other hand, decreasing values of the metric imply a closure of positions in the sector (whether by the users’ own volition or through liquidation), which can naturally result in lesser leverage. As such, the asset may become calm when the indicator is at low values.

Now, here is a chart that shows the trend in the Bitcoin open interest over the past year:

The value of the metric seems to have been going up in recent days | Source: CryptoQuant

As displayed in the above graph, the Bitcoin open interest has been heading up in the last few weeks, suggesting that investors have been opening more positions on the futures market.

In the chart, the quant has highlighted in yellow a territory where the open interest may be considered overheated. The indicator was in this zone in the lead-up to the FTX crash in November 2022, and it was also there between June and August.

In the first case, the market initially saw a short squeeze (that is, a mass amount of short liquidations) as the price saw some uplift, and then later, a long squeeze took place as the asset crashed, cooling down the open interest.

Bitcoin only saw a long squeeze in the second instance, as the cryptocurrency crashed in August. The indicator retraced to relatively low levels with this liquidation event.

From the graph, it’s apparent that the Bitcoin open interest has once again reached this yellow zone that proved to be a predictor for volatility in these last two occurrences.

In theory, the volatility due to the overheated futures market could take the asset in either direction. Still, given that only long squeezes could cool the market down the last two times the open interest ventured into this zone, BTC may once again see a similar outcome.

“Although I don’t expect anything to happen immediately, we need to keep an eye on it from now on,” notes the analyst. “Indeed, we should be cautious and not over-bet on our investments now that we have entered the overheating zone.”

BTC Price

Bitcoin has continued to move in an overall sideways trajectory during the past few weeks as the asset is still floating around the $34,400 level.

Looks like BTC hasn't moved much recently | Source: BTCUSD on TradingView

Featured image from Kanchanara on Unsplash.com, charts from TradingView.com, CryptoQuant.com