A quant has explained that bitcoin could end up seeing a prolonged decline if the past pattern in Open Interest ends up repeating itself.
bitcoin open interest has recently shown a similar trajectory to November 2021
In a quick shot from CryptoQuant mail, an analyst talked about the recent trend in bitcoin open interest. “Open interest” is a metric that measures the total number of btc derivatives contracts (in USD) that are currently open across all exchanges.
When the value of this indicator increases, it means that users are opening more positions in derivatives at the moment. Generally, the total leverage present in the sector increases when open interest increases, so the price is more likely to show some volatility following this trend.
On the other hand, a decrease in the metric suggests that some of the investors are closing their positions of their own volition or being forcibly liquidated by their platform.
Typically, sharp declines in the indicator accompany violent price action, but once the decline ends, the cryptocurrency may become calmer due to a clear lack of leverage.
Now, here is a chart showing the trend of bitcoin open interest over the past few years:
<img decoding="async" class="alignnone aligncenter" src="https://technicalterrence.com/wp-content/uploads/2024/03/Bitcoin-Could-See-39More-Pullback-Than-We-Think39-Quant-Says.png" alt="bitcoin Open Interest” width=”1280″ height=”641″ data-recalc-dims=”1″/>
The value of the indicator appears to have sharply gone down in recent days | Source: CryptoQuant
As shown in the chart above, bitcoin open interest had spiked to extremely high levels as the recent rally in the cryptocurrency's price occurred.
This trend was not particularly surprising, as rallies tend to generate speculation. However, the scale of the increase was quite extraordinary compared to the previous pattern.
“Open interest can be a powerful rally driver, but it can also be a clear indicator of overheating,” says the quant. “In that sense, open interest was a strong driver of the btc price in the 23rd and 24th, helping to push the price to new all-time highs in the 24.1Q.”
You can see from the chart that the indicator has recently reversed direction and has been falling. This reduction in the metric came as the price of the asset also plummeted, leading to a large number of liquidations.
As the analyst highlighted on the chart, the recent highs in bitcoin open interest were similar to those seen during the November 2021 price all-time high.
Back then, once open interest began to fall as the price plummeted, the asset entered a state of free fall, ultimately leading to the 2022 bear market.
“If the 21.4T pattern is repeated, we could see more setbacks than we think,” suggests the quant. Now it remains to be seen how the market develops from here and whether the trajectory of the Open Interest will be similar to this previous instance or not.
btc Price
bitcoin had fallen to a low of $60,700 over the past day, but the coin has witnessed a rebound since then as it is now back above $64,000.
<img loading="lazy" decoding="async" class="alignnone size-medium aligncenter" src="https://technicalterrence.com/wp-content/uploads/2024/03/Bitcoin-Could-See-39More-Pullback-Than-We-Think39-Quant-Says" alt="bitcoin price chart” width=”1534″ height=”854″/>
Looks like the price of the coin has been struggling recently | Source: BTCUSD on TradingView
Featured image from Shutterstock.com, CryptoQuant.com, Chart from TradingView.com
