Data shows that bitcoin futures open interest has recently increased and has reached territory that has caused volatility for the asset in the past.
bitcoin futures market may be overheating
As explained by an analyst at CryptoQuant Quicktake btc-approaching-the-overheating-zone” target=”_blank” rel=”noopener nofollow”>mailbtc open interest has entered the overheat zone following the latest rally in the cryptocurrency’s price.
“Open interest” here refers to the total number of bitcoin futures contracts open across all derivatives exchanges in the sector. Naturally, the metric takes into account both short and long positions.
When the value of this indicator increases, it means that investors are opening more positions in the futures market at this time. Generally, when this happens, the overall leverage in the market also increases and with the leverage, chaos can ensue.
Therefore, as long as the open interest has a high enough value, the cryptocurrency price is more likely to show a large amount of volatility/fluctuations.
On the other hand, decreasing values of the metric imply a closing of positions in the sector (either at the users’ own will or through liquidation), which can naturally result in lower leverage. As such, the asset can calm down when the indicator is at low values.
Now, here is a chart showing the trend of bitcoin open interest over the past year:
<img decoding="async" class="alignnone aligncenter" src="https://technicalterrence.com/wp-content/uploads/2023/10/Bitcoin-Open-Interest-Is-Overheating-Prepare-for-Volatility.png" alt="bitcoin Open Interest” width=”1280″ height=”615″/>
The value of the metric seems to have been going up in recent days | Source: btc-approaching-the-overheating-zone" target="_blank" rel="noopener nofollow">CryptoQuant
As shown in the chart above, bitcoin open interest has increased in recent weeks, suggesting that investors have been opening more positions in the futures market.
On the chart, the quant has highlighted in yellow a territory where open interest can be considered overheated. The indicator was in this zone in the run-up to the FTX crash in November 2022, and was also there between June and August.
In the first case, the market initially experienced a short squeeze (i.e. a massive amount of short liquidations) when the price saw some increase, and then, a long squeeze occurred when the asset crashed, cooling open interest.
bitcoin only experienced a long contraction in the second case, when the cryptocurrency crashed in August. The indicator retreated to relatively low levels with this liquidation event.
It can be seen from the chart that bitcoin‘s open interest has once again reached this yellow zone that proved to be a predictor of volatility in these last two events.
In theory, volatility due to the futures market overheating could drive the asset in either direction. Still, given that only long squeezes were able to cool the market the last two times open interest ventured into this zone, btc may see a similar result again.
“Although I don’t expect anything to happen immediately, from now on we must be attentive,” says the analyst. “In fact, we should be cautious and not bet too much on our investments now that we have entered the overheating zone.”
btc Price
bitcoin has continued to move in a general sideways trajectory over the past few weeks as the asset is still floating around the $34,400 level.
<img decoding="async" class="alignnone size-medium aligncenter" src="https://technicalterrence.com/wp-content/uploads/2023/10/Bitcoin-Open-Interest-Is-Overheating-Prepare-for-Volatility" alt="bitcoin price chart” width=”1534″ height=”869″/>
Looks like btc hasn't moved much recently | Source: BTCUSD on TradingView
Featured image by Kanchanara on Unsplash.com, TradingView.com charts, CryptoQuant.com