Bitcoin just hit a record in open interest — expect imminent volatility

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As the Bitcoin (BTC) and Ethereum (ETH) rally has gained pace, we have seen open interest in both assets return to record-high levels reminiscent of the feverish days of the 2021 rally. This frantic increase in trading activity is a sure sign that the bull market is finally in full swing. However, the parallels with 2021 are also a more worrying indicator that the market is overheating, with further volatility for BTC and ETH prices likely around the corner. 

That isn’t to say we are anywhere near the all-time highs we will see later in the cycle, but overzealous investors would be wise to exercise a certain amount of caution at these lofty prices. Indeed, Bitcoin has risen more than 50% over the past 30 days and is closing in on its ATH, while Ethereum is shooting the lights out with a 50% rise over the same time period.

But it’s not just this rapid price appreciation that foreshadows imminent volatility in the two biggest crypto assets. Technical indicators like open interest and Bitcoin funding rates — a reliable forecasting tool when taken in aggregate — paint a picture of a rather frothy market.

Related: Why Solana will prevail despite Ethereum ETFs

Last week, the funding rates in Bitcoin perpetual futures listed on Binance surpassed 100% for the first time in at least a year, which means that leverage is skewed toward the bullish side. Meanwhile, rising open interest represents a spike in the volume of open BTC and ETH derivatives positions on exchanges, including both long (buy) and short (sell) positions in Bitcoin and Ethereum futures or options contracts. Together, high funding rates, extreme price movements and rising open interest often act as a warning sign for traders, particularly those using leverage.

Open interest in Bitcoin hit $31 billion on March 4, easily surpassing the $24.3 billion record set on April 14, 2021. Bitcoin’s price was sitting close to current levels at that time, opening at $63,524 — before falling some 23% to $49,078 by April 26, 2021.

Meanwhile, open interest in ETH futures sat around $12 billion as of March 4, edging closer to the $13 billion peak seen on Nov. 9, 2021 — the day ETH opened at an all-time high of $4,810. By November 19, ETH fell to $3,996, 17% below its peak.

Bitcoin open interest as of March 4, 2024. Source: CoinGlass

Drawing parallels with 2021, it seems apparent that BTC and ETH need a breather. Bitcoin has soared more than 180% in the year leading to March 4. In some major currencies, including the Argentine peso and the Japanese yen, it has already surpassed its previous record. ETH is lagging behind, having risen more than 120% in 12 months.

Ethereum open interest as of March 4, 2024. Source: CoinGlass

There are a number of reasons for Ether lagging behind Bitcoin in terms of price movements, not least the fact that the deadline for a spot ETH ETF approval is still a few months away. We can expect further price appreciation in the lead-up to this historic decision. Similarly, the Bitcoin halving slated for next month will almost certainly be a catalyst for further price increases, if history is any indicator. 

So the rising open interest and funding rates don’t change the fundamentals around BTC and ETH — fresh all-time highs are still all but guaranteed this cycle. They’re simply a sign that the crypto market is getting away with itself. Such frantic trading isn’t just down to professional traders or long-term believers in crypto — it also indicates a rise in FOMO, and that’s a house of cards that can easily crumble in the short term.

In such frothy markets, it’s particularly important to have a solid strategy and stick to it, without allowing emotions to get in the way. For options traders, this means watching the charts and the data, not just the green candles. For buy-and-hold investors, it’s remembering that crypto is a volatile asset class and all signs point to further volatility incoming.

But most importantly, it’s a reminder for anyone in crypto to stay calm and avoid getting carried away with all the excitement of assets soaring towards their ATHs. There will be plenty more chances to get excited in the coming months. It’s those who keep their cool amid the market turbulence that will be the most successful in this bull run.

Lucas Kiely is the chief investment officer for Yield App, where he oversees investment portfolio allocations and leads the expansion of a diversified investment product range. He was previously the chief investment officer at Diginex Asset Management, and a senior trader and managing director at Credit Suisse in Hong Kong, where he managed QIS and structured derivatives trading. He was also the head of exotic derivatives at UBS in Australia.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.



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