Bitcoin (BTC) has been very volatile over the past few weeks, up above $ 16,000 for the first time in three years. However, the open interest of the futures market shows that this is likely A major volatility peak is very close.
The term “open interest” refers to the total number of contracts that are actively open on the futures market. When the open interest is high, This means that many traders are betting on the price development of Bitcoin.
Currently, as of November 13th, the founding partner of Bitazu Capital, Mohit sorout, found that The open interest in Bitcoin futures is at an all-time high. This means that the chances of higher volatility in the short term should come as no surprise.
Sorout said the “settlement festival” has not yet started, referring to Bitcoin’s tendency to see cascading sell-offs after large price moves. Said::
“The overall open interest in BTC futures and perpetuals has reached a new all-time high. The settlement festival has not even started yet.”
Higher open positions can trigger higher volatility
Bitcoin futures contracts typically offer high leverage of up to 125x. Traders can access 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. For example, if a trader places a 20x long at $ 16,300. With 20x leverage, A trader can trade $ 200,000 with $ 10,000 in capital.
However, due to the high leverage, the price range for the settlement is narrower. In the case of the 20x long at $ 16,300, If BTC falls below $ 15,600, the position will be liquidated.
If a position with a stop loss is liquidated, The trade would eliminate the entire position. So if a long position of $ 10,000 ($ 200,000) is liquidated in 20x, then $ 10,000 would be completely lost.
When there is a large price movement and the futures market’s open interest is high, Bitcoin tends to have massive volatility spikes.
It remains uncertain whether this trend would have a positive or negative impact on Bitcoin’s short-term price cycle. When long contracts are trimmed, the price of BTC falls, and when short contracts are liquidated, it rises.
On the 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 has seen a similar surge in trading activity and open interest.
Deribit, the leading exchange for cryptocurrency options, divided Skew’s chart shows the total open interest in Bitcoin options, which has also hit a record high in the past few days.
The timing of the options market’s open interest is remarkable because it is theoretical The open interest in options should peak by the end of the month.
Monthly BTC options contracts expire on the fourth Friday of each month, which is why open positions tend to increase in the last week of each month.
However, as Cointelegraph reported, the data shows that bulls are not impressed with the impending expiration of the $ 525 million option. As long as BTC stays above $ 15,500, the expiration of large options is unlikely to have a material impact on price.