Bitcoin Futures Market Overheating Again, Volatile Storm Ahead?

Data shows the Bitcoin futures market is starting to overheat again, which could lead to higher asset price volatility.

Bitcoin Open Interest Has Been Climbing Recently

As an analyst in a CryptoQuant Quicktake post explained, the open interest has seen some rise during the past month. The “open interest” is an indicator measuring the total amount of Bitcoin futures contracts currently open on all derivative exchanges.

When the value of this metric goes up, it means the investors are opening more positions on the futures market right now. Since new positions usually come with more leverage, such a trend can increase the overall leverage in the sector. This can make the price of the cryptocurrency more volatile.

On the other hand, the indicator decreasing implies that the investors are either closing their contracts or getting liquidated. This kind of trend usually results in the asset becoming more stable.

Now, here is a chart that shows the trend in the Bitcoin open interest over the past year:

As displayed in the above graph, the Bitcoin open interest had fallen to relatively low levels back in August. Still, the metric started to turn around again in September and has since climbed appreciably.

In the chart, the quant has highlighted the zone for the indicator where the risk of the price showing sharp volatility becomes particularly high. It would appear that while the open interest has gone up recently, it’s still just below this historical zone.

Interestingly, each time the indicator has entered this zone during the last year, it has exited with a sharp plummet. These plunges have been because of the occurrence of “liquidation squeezes.”

A liquidation squeeze is an event where a sudden swing in the price liquidates a large amount of contracts at once. These liquidations only help fuel this price move further, thus resulting in even more liquidations. In this way, liquidations can cascade down like a waterfall, and so the open interest naturally plunges.

The analyst has also attached the data for the short and long liquidations in the same chart. There would seem to be more long squeezes in this period than short ones.

The Bitcoin open interest can be the one to watch in the coming days, as the metric entering inside the volatility zone could lead to sharp action for the asset’s price.

In theory, any volatility that may emerge can go in either direction, but the precedence during the past year may suggest a long squeeze (and, hence, a price crash) could be more likely to happen.

BTC Price

At the time of writing, Bitcoin is trading at around $27,100, down 1% in the last week.