Data shows the Bitcoin Open Interest has dropped by 25% following the crash to levels below $26,500, the largest drop in around 1.5 years.
Bitcoin Open Interest Has Plunged 25% After Price Plummet
As pointed out by an analyst in a CryptoQuant post, this open interest flush could lead to a bottom for the cryptocurrency. The “Open Interest” here refers to the total amount of Bitcoin positions (measured in USD) currently open on all derivative exchange platforms.
When the value of this metric rises, it means that the speculators are opening up new positions in the market currently. Generally, whenever new positions crop up on exchanges, the total leverage in the market also heads up.
A high amount of leverage can lead to instability in the sector, so when the Open Interest observes high values, the price of the asset becomes more probable to display some volatility.
On the other hand, the metric going down suggests some investors are closing up their contracts, or are possibly getting liquidated, which can lead to the cryptocurrency becoming more calmer as there a fewer positions open now.
Now, here is a chart that shows the trend in the percentage change of the Bitcoin Open Interest over the last couple of years:
As displayed in the above graph, the Bitcoin Open Interest percentage change has observed a very sharp negative spike as the plunge in the cryptocurrency’s value has occurred. This means that the indicator’s value has taken a deep hit in this volatile event.
The reason for this drawdown is naturally the fact that a large number of investors have found liquidation. Mass liquidation events like this one are popularly referred to as “squeezes.” In a squeeze, a large amount of liquidations suddenly gets triggered by a sharp price move and only ends up providing further fuel for the volatility, thus causing even more liquidations.
It would appear that the latest crash has also observed such a cascade of liquidations. “As a result of this sudden movement, over $2.5B of Open Interest has been wiped out, equivalent to 25% of the total Open Interest,” explains the quant.
With the Open Interest registering such a large drop, the market could possibly become calmer, as at least the risk of another squeeze taking place might have become significantly lower now.
“This flushing out of speculators means that Bitcoin will likely seek a bottom where long-term investors will start accumulating again,” notes the analyst.
The volatility observed during the last day is a big departure from the endless sideways movement that BTC had been stuck in earlier. However, it now remains to be seen whether the market remains alive in the coming days, or if it would once more slump back to stagnation.
At the time of writing, Bitcoin is trading around $26,300, down 10% in the last week.