Open interest is a term that has gradually been gaining increased exposure within crypto circles in recent months, but what exactly does it mean and why does it matter to traders? We break down the ins and outs of open interest and show you how to use it in your trading activities.
What is Open Interest?
Simply put, open interest is the total number of outstanding contracts that have not been settled for an asset, in our case Bitcoin. These are essentially the cumulative number of open positions, as opposed to volume which gives you the number of closed positions. As with almost everything in the Bitcoin trading space these days, the term refers to margin trading, because this is by and large the only way people are making money on Bitcoin right now.
Open interest doesn’t dictate a market trend in itself, it merely shows how much interest is being taken in the market – a decreasing open interest shows that interest in an asset is declining, whereas an increasing open interest shows that more people are taking bets on the asset.
Take Other Factors into Account
When considering open interest, it is important to take other factors into account in order to try and predict market direction. This is where identifying the trend comes in handy, both from a fundamental and technical perspective.
If we take Bitcoin at the moment, the open interest has been solidly around the $1 billion mark in recent days, meaning that there is $1 billion riding on Bitcoin’s future movements. Looking at the technical aspect, we are in the middle of an uptrending channel having just come out of a six-month downtrend following a long bear market. Throw in the 2020 halving narrative and you would have to think that, in general, sentiment is bullish.
Therefore, it would be reasonable to think that factoring bullish fundamental and technical indicators into a large and increasing open interest suggests an imminent move to the upside is coming.
Open Interest Summary
In short, open interest means that more and more people are placing bets on the future direction of an asset, suggesting that volatility, in one direction or the other, is imminent.
For more information on technical analysis, see our Trading 101 series.
