Will Shorts Be Rekt This Time?

By Investor Empires On Aug 30, 2024

Data shows that the Bitcoin open interest rate on exchanges is trending up while the funding rate has recently turned negative.

Bitcoin’s open interest trend points to speculators returning

As CryptoQuant Community Manager Maartunn points out in a new article, mail In X, things seem to be heating up on the derivatives side of the market. There are two important indicators here: open interest and funding rate.

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The first, open interest, tracks the total amount of Bitcoin derivatives contracts, both short and long, currently open on all exchanges.

When this metric rises, it means that investors are opening new positions in the market now. Since new positions usually come with an increase in the overall leverage present in the sector, this type of trend can lead to higher volatility for the asset.

On the other hand, a decrease in the index value indicates that investors are either closing their positions on their own or liquidating their investments through their platform. The price of the coin may become more stable after this trend.

Now, here is a chart showing the trend of Bitcoin’s open interest over the past few days:

The scale value seems to have been trending upward recently | Source: @JA_Maartun is X

As shown in the chart above, Bitcoin’s average open interest saw a sharp decline earlier as a result of the cryptocurrency’s decline towards the $58,000 level, which resulted in a large amount of long positions being liquidated.

After noticing some sideways movement, the gauge started to rise again, indicating that investors were opening new positions. Naturally, such speculative activity leads to more volatility for the asset.

In theory, such fluctuations can take assets in any direction, but depending on the composition of positions present in the derivatives market, one direction may be more likely than the other.

The indicator that sheds light on the structure of the sector is the second metric of interest here: the funding rate. This indicator basically tracks the amount of periodic fees that traders in the derivatives market exchange with each other.

From the chart, it is clear that the Bitcoin funding rate has been negative during this recent surge in open interest. When the metric is negative, it means that shorts are paying a premium over longs to hold their positions, and therefore any new positions that have recently emerged in the sector will be shorts.