Open interest tracks the total number of outstanding open derivatives contracts, providing insights into market sentiment and direction. Unlike trading volume, open interest (OI) tracks the number of traders who hold their contracts.
- Open interest is an indicator that monitors the total amount of derivatives contracts open at any given moment
- An increase in open interest is a sign of a growing number of users entering the crypto market
- Open interest has to be analyzed together with other indicators
What is open interest in crypto
Open interest in cryptocurrency is an indicator that shows the total number of active futures and options contracts for the cryptocurrency market. Open interest focuses only on active contracts and indicates the number of traders actively participating in the market at a given time.
OI only tracks the number of active agreement contracts between buyers and sellers. In crypto, when new traders take a position in the market, open interest increases, and decreases when traders sell their position, either at a loss or in profit. Thus, OI creates a real-time snapshot of the market.
For example, if Bitcoin futures have an open interest of 50,000 contracts, this means 50,000 agreements between buyers and sellers remain active. This number changes constantly as new positions open and existing ones close throughout the trading day.
How to read open interest in crypto
Understanding how to interpret open interest requires analyzing the relationship between movement and changes in active contracts. So what does it really mean in certain situations?
In times when open interest in crypto increases in line with the market cap, this means that investors see potential upside, and new money enters the market. As we understand it, OI also tracks both buyers and sellers, and suggests that the upward trend may continue.
If prices are falling and open interest increases, bearish sentiment is prevailing as traders take new short positions, creating pressure on buyers.
When open interest is falling with rising prices, it suggests traders are locking in their profits. In our view, this scenario indicates potential reversals as traders have identified a possible top, which could lead to a reversal. On the other side, when prices are falling in line with decreasing OI, long positions are liquidated, and there is less demand for market action. In our view, this could signal a bottom formation.
Strategies for using open interest
Successful traders incorporate open interest analysis into their broader trading strategies rather than relying on it as a standalone indicator. One proven approach is using open interest for trend confirmation. When rising prices are accompanied by increasing open interest, it provides stronger conviction for maintaining long positions compared to price increases with declining open interest. Another strategy is reversal identification, which often appears when open interest patterns diverge from price action.
Market timing can also be improved through open interest analysis, particularly around key support and resistance levels. High open interest at specific price points often indicates significant trader positions that could influence future price behavior. This leads to a more robust trading signal when combined with technical analysis.
Open interest vs trading volume
Open interest has to be understood in relation to volume in the crypto market. Trading volume measures the number of contracts that are traded and can indicate active trading when the volume exceeds the standard number.
While volume shows the number of contracts traded, it doesn’t indicate whether new positions are being opened or closed. In contrast, open interest indicates the number of contracts that have remained active. By analyzing both metrics together, traders can gain insight into sustained market interest and potential price movements.
How volume affects open interest in crypto
Volume directly impacts open interest changes, but the relationship isn’t always straightforward. High volume can either increase, decrease, or maintain open interest levels depending on the nature of the trades.
When volume increases alongside rising open interest, new traders are establishing positions, suggesting trend continuation. For example, when Bitcoin’s price recently increased from $109,000 to $125,000, reaching an all-time high, open interest for BTC has spiked to new highs.
The most significant market moves often occur when both volume and open interest spike simultaneously, indicating new money and strong conviction behind the price movement.
How changes in open interest take place
Changes in open interest take place in four scenarios that can be tracked and analyzed.
New long and short positions. This is indicated in open interest by one contract for each new agreement between previously uninvolved traders and shows new traders entering the market.
Position transfers. When traders switch between positions, this doesn’t affect OI since the indicator tracks both sell and buy contracts. This means they actively cancel themselves out.
Long position closures. This occurs when existing long holders sell to existing short holders looking to cover their positions. For example, when a Bitcoin long contract is closed, open interest decreases by one contract per matched trade.
Uneven position changes. This happens when one side opens new positions while the other closes existing ones. Open interest remains stable, but the composition of market participants shifts.
Why is open interest important
Open interest provides insights into market depth, participant commitment, and the potential for sustained price movements. Through open interest analysis, liquidity assessment becomes more accurate, as higher open interest typically indicates better liquidity, making it easier to enter and exit positions without significant price impact.
Market sentiment analysis also improves when combining open interest with price action; for instance, rising open interest during uptrends suggests strong bullish conviction, while increasing open interest during downtrends indicates growing bearish sentiment.
Additionally, monitoring open interest helps with volatility prediction, as sudden spikes often precede significant price movements. For these reasons, any trader or someone who wants to understand market dynamics needs to look at open interest changes to gauge market positioning and identify potential opportunities.
Final words
Open interest serves as a powerful complement to traditional technical analysis, providing insights into market participation and trend strength that neither price nor volume can reveal independently. Mastering this metric and understanding how it applies to trading helps traders better understand the market.
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FAQ
Is a higher open interest in crypto good?
Yes, because when we trade and there’s a higher open interest, it means there’s market liquidity with higher participation, making slippage less common.
What happens when open interest is zero?
When open interest in crypto is zero, it means there is no interest in the token and often occurs for newly launched contracts or in periods when all positions have been closed, suggesting minimal liquidity and potentially wider bid-ask spreads.
Is open interest in crypto bullish or bearish?
No, we can’t say that only looking at open interest is either bullish or bearish. It depends on the accompanying price action, as rising open interest with increasing prices indicates bullish sentiment, while rising OI with falling prices indicates bearish sentiment.
