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Bitcoin (BTC) has been very volatile in recent weeks, surpassing $ 16,000 for the first time in three years. But the open interest in the futures market indicates that a significant peak in volatility is likely very close.
The term “open interest” refers to the sum total of contracts that are actively open in the futures market. If the open interest is high, it means that there is a high number of traders betting on Bitcoin price action.
Currently, as of November 13, Bitazu Capital’s founding partner Mohit Sorout has pointed out that open interest in Bitcoin futures is at an all time high. This means that the chances of increased volatility in the short term should come as no surprise.
Sorout said the “liquidation festival” had not started, referring to Bitcoin’s tendency to see cascading liquidations following large price movements. he said:
“The aggregate open interest of BTC futures and perpetual contracts hit a new high today. The liquidation festival hasn’t even started.”
Higher open interest can trigger major volatility
Bitcoin futures contracts typically offer high leverage of up to 125x. Traders can access any leverage between 1x and 125x depending on the platform.
When the leverage of a position is high, it means that the liquidation price is closer to the entry price. As an example, if a trader places a 20x long Bitcoin at $ 16,300. With 20x leverage, a trader can trade $ 200,000 with $ 10,000 capital.
But the high leverage means the liquidation price ranger is tighter. In the case of the 20x long at $ 16,300, if BTC falls below $ 15,600, the position would be liquidated.
If a position is closed with a stop-loss in place, the trade would clear the entire position. Therefore, if a long position of $ 10,000 ($ 200,000 position) in 20x is liquidated, $ 10,000 will be completely lost.
As such, when a major price move occurs and open interest in the futures market is high, Bitcoin tends to see massive spikes in volatility.
It remains to be seen whether this trend would have a positive or negative impact on Bitcoin’s short-term price cycle. If the long contracts are reduced, the BTC price goes down and if the short contracts are liquidated, it goes up.
On major futures exchanges, the average Bitcoin funding rate is 0.01%. This means that the market is relatively balanced and neither buyers nor sellers overwhelm the market.
The options market is also heating up
The rest of the Bitcoin derivatives market is also seeing an increase in trading activity and open interest.
Deribit, the best cryptocurrency options exchange, sharing Skew’s chart showing total open interest on Bitcoin options has also hit an all-time high in the past few days.
The timing of the surge in open interest in the options market is noteworthy because theoretically, open interest in options is expected to peak towards the end of the month.
Monthly BTC options contracts expire on the fourth Friday of each month, and as such, open interest tends to rise during the last week of each month.
But, as Cointelegraph reported, the data shows the bulls aren’t scared of the upcoming $ 525 million options expiration. As long as BTC stays above $ 15,500, the expiration of important options is unlikely to have a major impact on the price.
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