Market signal analysis: the role of open interest in cryptocurrency markets
As the popularity and acceptance of cryptocurrencies increases, market participants are increasingly interested in understanding the role of open interest in shaping price movements. Open interest is a key concept in derived instrument markets that are related to the number of defeated contracts at this time, while also plays an important role in cryptocurrency markets.
What is open interest?
The open interest is calculated by subtracting the number of articles “beyond money” (OTM) of the total number of open contracts. In a nutshell, the open interest represents the total number of possible transactions that can be made on the basis of a specific contract. This record is necessary to understand the moods of the market and the potential for variability.
How do cryptocurrency market prices affect open interest?
The relationship between open prices and cryptocurrency prices is complex and under the influence of several market factors. Here are some key points to consider:
- Increase in open interest can lead to higher prices : When the open interest increases, it usually indicates a greater demand for basic assets (for example, bitcoin). This can lead to higher prices, because more merchants are trying to buy or sell assets. And vice versa, a decrease in open interest may indicate lower demand and potentially lower prices.
- The reduced open interest can lead to lower prices : The reduced open interest often indicates that there is less purchase activity, which can reduce prices. This is due to the fact that fewer buyers are ready to participate in the market, which leads to a reduction in the amount of billing and possible price falls.
- For example, an increase in the OTM position may indicate that merchants bet on a specific trend or event, while the decrease can suggest reversing fortune.
- The impact of the turnover : The open interest is closely related to the negotiation volume, because the most open contracts often cause greater commercial volumes. And vice versa, reduced open interest can lead to lower commercial volumes and potentially lower prices.
Case study: Bitcoin
To illustrate the role of open interest in cryptocurrency markets, let’s see Bitcoin (BTC) as an example. According to Condeska’s data, the average mobility of 14 days of Bitcoin’s open interest has grown constantly since October 2020, coinciding with the growth of institutional investors and greater market capitalization.
Key observations
- The increase in open interest correlates with higher prices : An increase in open interest in the third quarter of 2021 led to a significant recognition of bitcoins (from around 3000 USD to more than USD 28,000).
- The reduced open interest correlates with lower prices : otherwise, when the open interest fell from the summit in October and November 2021, prices began to fall.
- The rapid growth or decrease in the OTM position often indicates a change in the market direction.
Application
Understanding the role of open interest in cryptocurrency markets is crucial for merchants and investors who wish to navigate the complex panorama of digital assets. When analyzing data on open interest, market participants can obtain an idea of possible price movements and make more aware decisions regarding their investment. As the cryptocurrency market has evolved, it is necessary to be up to date with the latest achievements and trends to use possibilities and avoid losses.
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