Understanding Open Interest in the Crypto Market

Open Interest represents the total number of open futures or options contracts in a given market. It's calculated by summing up all open positions, whether long or short, and subtracting closed positions. Changes in OI are closely tied to the price of the underlying asset and often serve as a leading indicator, helping predict the future trend direction.

For instance, when both the price of Bitcoin (BTC) and open interest in BTC futures rise simultaneously, it typically signals a continued uptrend. Conversely, a drop in OI during a correction suggests an impending downtrend.

When one trader opens a position anticipating a price increase and another opens a position expecting a price decrease, it results in mutual obligations and an increase in open interest. These obligations are secured by margin from both parties. If the price moves in favor of the buyer, the seller's margin decreases, and the buyer's margin increases, and vice versa.

Both buyer and seller open positions: OI increases.

Both buyer and seller close their positions: OI decreases.

Buyer opens positions while the seller closes: OI remains unchanged.

Buyer closes positions while the seller opens: OI remains unchanged.

What Can Open Interest Tell Us?

Price Trends: Changes in the number of open positions can indicate a trend change. An increase in open orders suggests more capital flowing in, signaling a strengthening trend, while a decrease indicates reduced inflow and a weakening trend.

Market Sentiment Analysis: To gauge market sentiment at any given moment, you can use open interest in conjunction with price and volume indicators. Simultaneous increases in open interest and price indicate an active bullish market, but if the price rises while open interest falls, it suggests a weakening uptrend. A decline in both open interest and price points to a market consolidation phase. Conversely, a price drop accompanied by rising open orders indicates market weakness.