A quant has explained that Bitcoin could end up seeing an extended drawdown if the past pattern in the Open Interest ends up repeating.
Bitcoin Open Interest Has Shown Similar Trajectory To November 2021 Recently
In a CryptoQuant Quicktake post, an analyst talked about the recent trend in the Bitcoin Open Interest. The “Open Interest” is a metric that measures the total amount of BTC derivative contracts (in USD) that are currently open on all exchanges.
When the value of this indictor rises, it means that users are opening up more derivative positions right now. Generally, the total leverage present in the sector increases when the Open Interest rises, so the price may become more likely to show some volatility following this trend.
On the other hand, a decline in the metric suggests some of the investors are either closing up their positions of their own volition or getting forcibly liquidated by their platform.
Usually, sharp decreases in the indicator accompany violent price action, but once the drawdown has finished, the cryptocurrency may become calmer due to a clear out of leverage.
Now, here is a chart that shows the trend in the Bitcoin Open Interest over the past few years:
The value of the indicator appears to have sharply gone down in recent days | Source: CryptoQuant
As displayed in the above graph, the Bitcoin Open Interest had shot up to some extremely high levels as the recent rally in the cryptocurrency’s price had occurred.
This trend wasn’t particularly surprising, as rallies tend to drive speculation. The scale, of the surge, though, was quite extraordinary when compared to past pattern.
“Open interest can be a powerful rally driver, but it can also be a clear indicator of overheating,” says the quant. “In that sense, open interest was a strong driver of BTC’s price in ’23 and ’24, which helped push the price to new all-time highs in ‘24.1Q.”
From the chart, it’s visible that the indicator has reversed its direction recently and has been falling down. This drawdown in the metric has come as the asset’s price has also crashed, causing a high amount of liquidations.
As the analyst has highlighted in the chart, the recent highs in the Bitcoin Open Interest were similar to those observed during the November 2021 price all-time high.
Back then, once the Open Interest had started sliding off as the price had plunged, the asset entered into a state of freefall, which eventually led to the 2022 bear market.
“If the pattern of ‘21.4Q repeats, we could see more pullback than we think,” suggests the quant. It now remains to be seen how the market develops from here and if the trajectory of the Open Interest would go similarly to this previous instance or not.
BTC Price
Bitcoin had slipped all the way to a low of $60,700 during the past day, but the coin has witnessed a rebound since then, as it’s now back above $64,000.
Looks like the price of the coin has been struggling recently | Source: BTCUSD on TradingView