Notional open interest in bitcoin (BTC) futures and perpetual futures, a crucial market sentiment gauge, has declined roughly 18% from $37 billion to $30.2 billion in one month, alongside a 14% slide decline in the cryptocurrency’s spot market price, according to data source Coinglass.
At first glance, the data suggests that longs or bullish leveraged bets anticipating a price rise have been squared off over the past four weeks. In other words, BTC’s price drop is supported by the unwinding of bullish bets. However, a deeper analysis reveals more nuanced dynamics at play in the market.
Open interest refers to the number of active or open contracts at a given time, and notional open interest is calculated by multiplying the number of units in one contract by its current spot market price. Changes in the asset price impact notional open interest, even if the total number of contracts remains steady, potentially leading to a misleading interpretation of market activity.
Per Coinglass, open interest has remained steady above the 500,000 BTC mark over four weeks. Meanwhile, perpetual funding rates charged by exchanges every eight hours have consistently held positive, indicating a bias for bullish bets. The combination of steady open interest in BTC terms, positive funding rates, and declining notional open interest suggests that traders are actively setting fresh long positions, countering the supposed unwinding of bullish bets by other participants.
Traders are cautiously optimistic about the market, with some setting protection strategies amidst uncertainty. The recent liquidity washouts have contributed to market volatility, but the willingness to enter long positions remains evident. The positive spread between futures and spot prices, known as basis, along with expectations of a breakout once selling pressure subsides, further support this view.
Activity in the spot and options market also indicates a bullish bias. Bitfinex whales have been observed buying the dips in the spot market, while margin longs on the platform have increased. In the options market, traders are favoring topside bets, suggesting anticipation of a year-end rally.
Overall, despite the recent price decline in bitcoin, various market indicators point towards underlying bullish sentiment and strategic positioning by traders. The interplay between open interest, funding rates, and market dynamics underscores the complexity of cryptocurrency trading and the importance of thorough analysis in interpreting market trends.