Open interest shows whether money outflows or inflows into the derivatives market, and it is a reliable preliminary indicator of the mid-term Bitcoin trend.
Explaining Open Interest in the Futures & Options Markets
Open interest refers to the total number of derivative contracts (futures or options) that remain active at the end of the trading day. Note, that the number of outstanding futures/options contracts is not a fixed number and changes by the day. That number changes as some traders open new positions and others close their existing positions. In short, open interest indicates the total number of options or futures that have not been yet settled.
□ Open interest measures the total number of bought or sold contracts, not the sum of both together
□ The open interest only changes when a new trader creates a new position or when an existing trader closes an existing position
What can open interest indicate?
□ Shows general market sentiment on many asset classes (equities, crypto, etc.)
□ Indicates money inflows/outflows into the futures and options market
□ Indicates market liquidity
□ Recognizes markets that are about to enter strong trends
□ Confirms the strength of existing price trends
□ Confirms potential tops/bottoms
Comparing Futures Open Interest to Futures Market Volume
Open interest and futures market volume are correlated to some extent. However, open interest refers to the number of total futures contracts that remain open, while, volume refers to the total contracts that have been traded throughout the day.
Example
If a new trader buys 5 contracts from an existing trader, that leaves open market interest unchanged. The open interest remains the same as NO new positions have been added to the market. However, at the same time, volume is increased by 5 contracts.
Using Open Interest to Analyze Trends
As mentioned above, open interest shows the money inflows/outflows into a particular market. Increasing open interest signifies that more traders are becoming active in a market and that works as a confirmation of a stronger trend. On the contrary, decreasing open interest signifies that a price trend is weakening. Large changes in open interest indicate that large players are entering/leaving the market and may forecast a new price direction.
By measuring the acceleration or deceleration in open interest figures we can validate the continuation/capitulation of a price trend.
Example
Let’s assume that a market is booming for several months, and open interest is steadily increasing as the market goes up. That is a healthy condition for the continuation of the trend. However, if the trend shows some signs of capitulation, and at the same time, open interest is decelerated, we may conclude that a trend reversal is about to happen.
Open interest tends to peak at the same time when the underlying market tends to peak. Let’s examine another example, on Bitcoin, during the bull market 2020-2021.
Image: BTC/USD Market & Aggregated Open Interest of Bitcoin Futures
Note: The total Bitcoin futures open interest is calculated as the sum of all open futures positions in the largest cryptocurrency exchanges. More on sources.
By observing the above charts, we can see that the BTC/USD and the Aggregated Open Interest charts are actually identical. Furthermore, the Open Interest seems to weaken faster (at the top) than the Bitcoin trend. Therefore, we may conclude that significant changes in the open interest can work as a preliminary indicator of upcoming changes in key BTCUSD trends.
Open Interest Analysis -Links
Open interest can refer to futures or options contracts and the relative data is published on a daily basis:
(A) EQUITIES
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CME OPTIONS: https://www.cmegroup.com/markets/products.html#assetClass=4&cleared=Options&search=nasdaq&sortField=oi
(B) FOREIGN EXCHANGE
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CME OPTIONS: https://www.cmegroup.com/trading/fx/options.html
(C) METALS
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CME OPTIONS: https://www.cmegroup.com/markets/products.html#assetClass=sg-35&cleared=Options&sortField=oi
(D) CRYPTOCURRENCIES
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BYBIT (AGGREGATE FUTURES): https://www.bybt.com/BitcoinOpenInterest
SOURCES:
- CME: https://www.cmegroup.com/education/courses/introduction-to-futures/open-interest.html
- BITCOIN FUTURES: https://www.theblockcrypto.com/data/crypto-markets/futures/aggregated-open-interest-of-bitcoin-futures-daily
■ Open Interest and Bitcoin Markets
Giorgos Protonotarios, Financial Analyst
for TradingCenter.org (c)
31st of May, 2021
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