How to Interpret Market Sentiment The Correlation between Bitcoin Open Interest and Price Developments
The number of open contracts in futures can be viewed as an indicator of market liquidity. However, since the beginning of 2024, the open positions in Bitcoin futures have shown a consistent trend with the price movement. Can we uncover clues through on-chain data?
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This Year, Bitcoin Open Positions are Highly Correlated with Price Trends
In the Medium Term, They Follow Separate Trends
How to Interpret Open Contract Numbers and Market Sentiment
On-chain data indicates that in the past few months, the open interest (OI) of cash-settled Bitcoin futures has fluctuated significantly. From the charts, it can be observed that the trend of open contracts in Bitcoin futures is highly correlated with the spot price.
At the beginning of January 2024, the OI for cash-settled futures across all exchanges started at approximately 280,000 BTC and steadily rose, reaching a peak of around 340,000 BTC by mid-March. After this peak, Bitcoin experienced a significant decline, hitting a low near 280,000 BTC in early May. This correlates with the volatility in Bitcoin’s spot price, as it reflects fluctuations in the futures market. Following the halving in April, open contracts increased again, maintaining levels above 300,000 BTC, indicating that market participants reignited their interest in trading in preparation for the upcoming market trends.
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When we take a broader view and observe medium-term data, it becomes evident that from January 2021 to 2023, the number of open cash-settled contracts in Bitcoin exhibited a more pronounced upward trend, peaking at 380,000 BTC by the end of 2022. This period encompasses the previous bull market and the subsequent bear market, yet the overall trend of open contracts remains upward. Notably, by the end of 2023 and the beginning of 2024, the number of open contracts significantly increased, surpassing 350,000 BTC. This suggests that in medium-term data, the volume of open contracts has followed a different trajectory from Bitcoin’s price. Halving events are typically believed to have a substantial impact on Bitcoin’s price, leading market participants to increase their positions, reflecting expectations for potential price increases.
Changes in the number of open contracts can also be seen as an indicator of market sentiment. During periods of price volatility, an increase in open contract numbers typically signifies that more market participants are engaging in trading, potentially indicating a strengthening bullish sentiment. Conversely, a decrease in open contracts may suggest a more cautious attitude among market participants or an increase in uncertainty regarding future price trends.
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