How to interpret market sentiment when Bitcoin open interest aligns with price development?
The number of open futures contracts can be seen as an indicator of market liquidity. However, since the beginning of 2024, the open positions of Bitcoin futures have been consistent with the price trend. Can we find clues through on-chain data?
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On-chain data shows significant fluctuations in the open interest (OI) of cash-settled bitcoin futures contracts over the past few months. It can be observed from the chart that the trend of bitcoin futures OI is highly correlated with the spot price.
At the beginning of January 2024, the OI of cash-settled futures across all exchanges started at around 280,000 BTC and steadily increased, reaching a peak of around 340,000 BTC in mid-March. Following this peak, Bitcoin experienced a significant decline, bottoming out near 280,000 BTC in early May. This is related to the volatility in the spot price of Bitcoin as it reflects the fluctuations in the futures market. After the halving in April, the OI rose again, maintaining levels above 300,000 BTC, indicating renewed interest from market participants in preparation for the upcoming market trends.
Zooming out to observe the mid-term data, it can be noted that from January 2021 to 2023, there was a more significant upward trend in the OI of cash-settled bitcoin futures contracts, reaching a peak of 380,000 BTC by the end of 2022.
This period covers the previous bull market and subsequent bear market, yet the overall trend in the OI remains upward. Particularly towards the end of 2023 and the beginning of 2024, there was a significant increase in the OI, surpassing 350,000 BTC. This indicates that in the mid-term data, the OI has taken a different path from the Bitcoin price. The halving event is usually expected to have a significant impact on the Bitcoin price, leading market participants to increase their positions, reflecting expectations of potential price increases.
The changes in open interest can also be seen as an indicator of market sentiment. During periods of price volatility, an increase in open interest often indicates more market participants engaging in trading, potentially signaling a bullish sentiment in the market. Conversely, a decrease in open interest may suggest a more cautious stance from market participants or increased uncertainty about future price movements.