BTC open interest hits record high, market may be volatile

As the rally in Bitcoin and ETH gathers pace, we see open interest in both assets returning to record high levels, reminiscent of the frenetic days of the 2021 rally. This crazy increase in trading activity is a clear sign that the bull market is finally in full swing. However, the similarities to 2021 are also more concerning, suggesting that the market is overheating and that further volatility in BTC and ETH prices may be on the horizon.

This is not to say that we are close to the all-time highs we will see later in this cycle, but overzealous investors would be wise to maintain a degree of caution at these high levels. In fact,

Bitcoin has gained over 50% in the past 30 days and is approaching its ATH, while Ethereum has gained 50% in the same period. But it’s not just rapid price appreciation that signals coming volatility for the two largest crypto assets. Technical indicators such as Open Interest and Bitcoin Financing Rate (which taken together are a reliable predictive tool) paint a picture of a rather frothy market.

Last week, the funding rate for Bitcoin perpetual futures listed on Binance exceeded 100% for the first time in at least a year, which means the leverage is biased towards the bullish side. At the same time, the increase in open interest means a surge in the number of open BTC and ETH derivatives positions on exchanges, including long (buy) and short (sell) positions in Bitcoin and Ethereum futures or options contracts .

High financing rates, extreme price swings, and rising open interest often constitute warning signs for traders, especially those using leverage.

On March 4, Bitcoin’s open interest reached $31 billion, easily surpassing the previous record of $24.3 billion set on April 14, 2021. Bitcoin prices were close to current levels at the time, opening at $63,524 before falling about 23% to $49,078 by April 26.

Meanwhile, open interest in ETH futures stood at approximately $12 billion as of March 4, close to the $13 billion peak reached on November 9, 2021, the day ETH opened at an all-time high of $4,810. By November 19, ETH dropped to $3,996, 17% below its peak.

Bitcoin open interest as of March 4, 2024. Source: CoinGlass
Compared to 2021, BTC and ETH clearly need to take a breather. As of March 4, Bitcoin had soared more than 180% in a year. Some major currencies, including the Argentine peso and the Japanese yen, have surpassed previous records. ETH lags behind, up more than 120% in 12 months.

Ethereum Open Interest as of March 4, 2024

There are many reasons why Ethereum lags behind Bitcoin in terms of price action, especially the distance from the Spot ETH ETF The deadline for approval is still months away. We expect further price increases ahead of this historic decision. Likewise, if history is any guide, next month’s Bitcoin halving will almost certainly serve as a catalyst for further price gains.

Therefore, increases in open interest and funding rates do not change the fundamentals of BTC and ETH - new all-time highs will still be reached this cycle. They are just one sign that the cryptocurrency market is coming out of trouble. This frenzied trading isn’t just down to professional traders or long-time believers in cryptocurrencies — it’s also indicative of increasing FOMO, a house of cards that can easily collapse in the short term.

In such a frothy market, it is especially important to develop a solid strategy and stick to it, and not let emotions get in the way. For options traders, this means looking at charts and data, not just green candles. For buy-and-hold investors, remember that cryptocurrencies are a volatile asset class, and all signs point to further increases in volatility.

But most importantly, it serves as a reminder to anyone in the cryptocurrency space to stay calm and avoid getting carried away in the excitement of an asset surging to its highest levels. There will be many more exciting opportunities in the coming months. Those who remain calm amid market turmoil will be the most successful in this bull market.

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