Bitcoin Derivatives Positions Piling Up: Prepare For Chaos?

Data shows the Bitcoin Open Interest has been heading up again recently, a sign that volatility could be coming for the asset’s price.

Bitcoin Binance Open Interest Has Registered A Notable Increase Recently

As explained by an analyst in a CryptoQuant Quicktake post, the BTC Open Interest on Binance has risen to $28.3 billion recently. The “Open Interest” here refers to an indicator that keeps track of the total amount of Bitcoin-related positions currently open on a given platform.

When the value of this metric goes up, it means the investors are opening up fresh positions on the exchange right now. Generally, more positions imply more leverage in the market, so this trend can lead to more volatility in the asset’s price.

On the other hand, the indicator witnessing a decline suggests the holders either are closing up their positions of their own will or are getting liquidated by their platform. BTC may become more stable when this happens due to the decrease in overall leverage.

Now, here is a chart that shows the trend in the Bitcoin Open Interest for Binance over the past year:

Looks like the value of the metric has been going up over the last few weeks | Source: CryptoQuant

As displayed in the above graph, the Bitcoin Open Interest on Binance has been riding an uptrend recently, suggesting that speculative interest among traders on the platform has been on the rise.

More specifically, the indicator has registered an increase of around $6.8 billion over the last couple of weeks, taking the total positions open on the exchange to about $28.3 billion. This value isn’t far from the all-time high (ATH) that the metric set earlier in the year.

As mentioned before, a rise in Open Interest can lead to more volatility for Bitcoin. On paper, this sharp price action emerging from the trend can lead BTC in either direction, but as the quant has highlighted in the chart, the recent spikes in the Binance Open Interest have generally been bearish for the coin.

The source of the volatility in these cases was a mass amount of long liquidations, an event that’s popularly called a long squeeze. During a squeeze, mass simultaneous liquidations feed back into the price move that caused them, thus elongating it, and unleashing a further cascade of liquidations.

An indicator that can tell us which side of the derivatives market is more likely to see a squeeze is the Funding Rate, which measures the amount of periodic fee the derivatives traders currently pay each other.

The trend in the BTC Funding Rate over the last couple of years | Source: CryptoQuant

The chart shows that the Bitcoin Funding Rate has been positive recently, suggesting that long investors have been paying a fee to the short ones. Thus, the market is long-dominant at the moment.

Mass liquidations can be more likely to affect the side with more positions, so a long squeeze could be on the cards, should some volatility occur in the market.

BTC Price

At the time of writing, Bitcoin has been floating around $63,500, up almost 10% over the last seven days.

The price of the coin appears to have been rising over the last few weeks | Source: BTCUSDT on TradingView

Featured image from Dall-E, CryptoQuant.com, chart from TradingView.com