Bitcoin Open Interest Trend Suggests Speculators Are Back

Data shows the Bitcoin Open Interest on exchanges has been heading up while the Funding Rate has turned negative recently.

Bitcoin’s price has been struggling to gain any bullish momentum over the last few days. The cryptocurrency had managed to climb back above the $61,000 level yesterday, but it seems to have lost this support once more. At the time of writing, BTC’s price is trading around $59,800, down 0.5% over the past 24 hours.

In the past week, the coin has shown some promising strength as it recovered from lows of $58,000. However, further gains have been capped at the $61,000 to $62,000 resistance zone, which had led to a consolidation within a narrow range.

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Now, as Bitcoin’s price action stalls within this consolidation, key on-chain metrics may provide some insight into the next directional bias for the asset. One such metric is the Open Interest.

Bitcoin Open Interest Shows New Speculative Activity

The Open Interest is an indicator that points towards the total number of derivatives contracts, whether short or long positions, that are currently open on all exchanges.

When the value of this metric goes up, it means that investors are opening up fresh positions on the market right now. As new positions generally come with an increase in the overall leverage present in the sector, this kind of trend can lead to higher volatility for the asset.

On the other hand, the indicator’s value observing a decline implies investors either are closing up positions of their own volition or are getting liquidated by their platform. The coin’s price may become more stable following this trend.

Now, here is a chart that shows the trend in the Bitcoin Open Interest over the past few days:

Bitcoin Open Interest had taken a hit earlier in this downtrend (from the graph). As BTC price fell towards the $58,000 level, a large amount of long positions were liquidated. After observing some sideways movement, the metric has been on its way back up again, suggesting investors have been opening new positions. This speculative activity can naturally lead to more volatility for the asset.

In theory, such volatility can take the asset in either direction, but depending on the composition of the positions present on the derivatives market, one direction may be more probable than the other.

The indicator that sheds light on the structure of the sector is the second metric of interest here: the Funding Rate. This indicator basically keeps track of the amount of periodic fee that traders on the derivatives market are exchanging between each other.

Bitcoin Funding Rate Is Negative, Suggesting Short Positions

From the chart, it’s visible that the Bitcoin Funding Rate has been negative during this recent Open Interest increase. When the metric has a negative value, it means the short holders are paying a premium to the longs in order to hold onto their positions, so the new positions that have appeared in the sector recently would be short ones.

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Because of the short-heavy market, it’s more likely that these investors betting on a bearish outcome get caught up in a mass liquidation event, thus taking Bitcoin is a more bullish direction. It only remains to be seen, though, as to how BTC’s price action would play out in the coming days.