What is Open Interest and Why Does it Matter?

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  • Open interest is a term that has become more common as margin trading has become more popular in the crypto space
  • It can offer a guide as to what the market may be about to do in the short-term
  • What exactly is open interest and how can you use it to your advantage?

Open interest is a term that has been gaining increased exposure within crypto circles as margin trading has grown in popularity, 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 margin 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.

Open interest doesn’t dictate a market trend in itself, it merely shows how much interest is being taken in the market; a decreasing level of open interest shows that interest in an asset is declining, whereas an increase in 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 $18 billion mark in recent days, meaning that there is $18 billion riding on Bitcoin’s future movements. Given that Bitcoin has just emerged from a near two-year bear market and we have two huge catalysts in 2024 including the Bitcoin halving and a probable Bitcoin ETF, 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.