Opinion: BTC open interest hits record high, market may fluctuate

As the pace of Bitcoin and ETH’s rally gathers pace, we’re seeing open interest return to record highs for both assets, reminiscent of the manic days of the 2021 rally. The frenetic increase in trading activity is a clear sign that the bull run is finally in full swing. However, the similarities to 2021 are also more worrying, suggesting that the market is overheated and further volatility in BTC and ETH prices could be imminent.

This is not to say that we are anywhere near the all-time highs we will see later in this cycle, but overzealous investors would be wise to exercise a degree of caution at these high levels. In fact, Bitcoin has risen more than 50% in the past 30 days and is approaching its ATH, while Ethereum has risen 50% in the same period.

But it’s not just the rapid appreciation in price that portends impending volatility for the two largest crypto assets. Technical indicators like open interest and Bitcoin funding rate — a reliable predictive tool when taken together — paint a picture of a rather frothy market.

Last week, the funding rate for Bitcoin perpetual futures listed on Binance exceeded 100% for the first time in at least a year, meaning leverage is biased towards the bullish side. Meanwhile, rising open interest means a surge in the number of open BTC and ETH derivatives positions on exchanges, including long (buy) and short (sell) positions in Bitcoin and Ethereum futures or options contracts. High funding rates, extreme price volatility, and rising open interest often serve as warning signs for traders, especially those using leverage.

On March 4, Bitcoin’s open interest reached $31 billion, easily surpassing the previous record of $24.3 billion set on April 14, 2021. At the time, Bitcoin’s price was close to current levels, opening at $63,524 before falling about 23% to $49,078 by April 26.

Meanwhile, as of March 4, open interest in ETH futures was around $12 billion, close to the peak of $13 billion set on November 9, 2021, when ETH opened at an all-time high of $4,810. By November 19, ETH had fallen to $3,996, 17% below its peak.

Bitcoin open interest as of March 4, 2024. Source: CoinGlass

BTC and ETH clearly needed a breather compared to 2021. As of March 4, Bitcoin has surged more than 180% in a year. Some major currencies, including the Argentine Peso and the Japanese Yen, have surpassed their previous records. ETH has lagged behind, rising more than 120% in 12 months.

Ethereum open interest as of March 4, 2024. Source: CoinGlass

There are many reasons why Ethereum is lagging behind Bitcoin in terms of price action, not least the fact that we are still months away from the deadline for the approval of a spot ETH ETF. We expect prices to rise further before this historic decision is made. Likewise, if history is any guide, next month’s Bitcoin halving will almost certainly serve as a catalyst for further price increases.

Therefore, the increase in open interest and funding rates does not change the fundamentals of BTC and ETH - new all-time highs are still set for this cycle. They are just a sign that the cryptocurrency market is getting out of trouble. This crazy trading is not just due to professional traders or long-term believers in cryptocurrency - it also shows the increase of FOMO, which is a house of cards that can easily collapse in the short term.

In such a frothy market, it’s especially important to develop a solid strategy and stick to it, without letting emotions get in the way. For options traders, this means watching charts and data, not just green candles. For buy-and-hold investors, remember that crypto is a volatile asset class, and all signs point to further volatility.

But most importantly, it’s a reminder for anyone in the cryptocurrency space to stay calm and avoid getting carried away by the excitement of assets surging to new heights. There will be more exciting opportunities in the coming months. Those who stay calm amid the market turmoil will be the most successful in this bull run.