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There was a time when the BitMEX derivatives exchange ruled sovereign over other exchanges, and the company effectively held a 50% market share until July 2019. For this reason, traders kept a close eye on every connected indicator. to BitMEX, including its funding rate, open interest, and base.
Open interest measures the total number of contracts held by market participants. As the number increases, so does the potential size of liquidations. On August 2, a crash of $ 1,400 occurred as $ 1 billion in futures contracts were forcibly closed due to insufficient margins.
While there is no magic number, traders tend to tremble as open interest approaches $ 1 billion, causing a phenomenon some traders refer to as the BitMEX ghost. This became evident in the second half of 2019, when massive drops in Bitcoin’s price occurred in seven different instances when open interest exceeded $ 1 billion.
The perceived risk associated with a high open interest depends on the liquidity of the underlying asset. During the third quarter of 2019, Bitcoin’s regular volume on spot exchanges averaged $ 2.4 billion per day. So, a single contract totaling 42% of Bitcoin volume seemed quite large.
As the chart above shows, there is no doubt that open interest of nearly $ 1 billion coincided with relevant price drops from July through September. It should be noted that a significant number of contracts in progress cannot be considered bullish or bearish.
The second half of 2019 was pretty bearish
The second half of 2019 has been quite difficult for cryptocurrencies and, as most investors will recall, even President Trump has publicly criticized Bitcoin, as Cointelegraph reports. All of this came as US Treasury Secretary Steven Mnuchin demanded additional regulation and oversight of the industry.
The chart above shows much better detail about the relevance of BitMEX’s 40% market share at the time. A single exchange held an open interest equivalent to half of Bitcoin’s daily spot volume.
Fast forward to 2020, and BitMEX was dethroned by OKEx, where total open interest on perpetual and fixed month futures topped $ 1 billion on July 25.
The remaining applicants continued to increase their share, but it was only recently that the Chicago Mercantile Exchange (CME), Binance and Bybit managed to break the billion dollar psychological barrier.
Today’s market looks slightly like 2019, but with less risk
Oddly, this happened on November 20, just four days before the 16% crash to $ 16,334. Total open interest on futures contracts in September 2019 was $ 3 billion to put it in perspective. This time around, four exchanges managed to break through the billion dollar mark.
Although the open interest on futures contracts rose to $ 7.4 billion, the average daily volume on regular spot exchanges increased to $ 7.4 billion, where the figure is now 3.5. billions of dollars. So, unlike the year before, a single exchange holding $ 1 billion open interest shouldn’t raise eyebrows the same way it did in 2019.
To sum up, the markets have grown and developed to the point that the BitMEX ghost has disappeared, but it could have been replaced by a similar phenomenon that occurs when four exchanges cross the open interest mark for futures of $ 1 billion.
Either way, it is worth keeping a close eye on such an indicator from now on, as these four exchanges have replaced BitMEX as the market leader. Combined, Binance, CME, OKEx, and Bybit hold more than half of the open interest in futures contracts. While such a coincidence has only happened once, it does indeed mimic the billion dollar effect of the past.
The views and opinions expressed herein are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You need to do your own research when making a decision.
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