Author: Omkar Godbole, CoinDesk; Translated by: Deng Tong, Golden Finance
Although notional open interest has declined, open interest measured in Bitcoin has remained stable with positive funding rates.
Observers said this was a sign of renewed long demand during the price decline.
Data shows that notional open interest in Bitcoin (BTC) futures and perpetual futures, a key market sentiment indicator, fell about 18% from $37 billion to $30.2 billion in a month, while the cryptocurrency spot market price also fell 14%.
At first glance, the data suggests that long or bullish leveraged bets anticipating price increases have unwound over the past four weeks. In other words, the unwinding of bullish bets has driven the decline in Bitcoin prices.
This interpretation may be partially correct at best and obscures the market's bullish undercurrent.
Open interest refers to the number of active or open contracts at a given time. Notional open interest is calculated by multiplying the number of units in a contract by the current spot market price. Therefore, even if the total number of contracts remains stable, changes in asset prices can affect notional open interest, giving a misleading picture of market activity.
This appears to be the case with the Bitcoin market.
According to Coinglass data, open interest has remained stable above the 500,000 BTC mark for four weeks. Meanwhile, the perpetual funding rate charged by exchanges every eight hours has remained positive, indicating a bullish bet bias.
BTC futures open interest is denominated in BTC. (Coinglass)
Bitcoin's stable open interest and positive funding rate, combined with a decline in notional open interest, suggest some traders have been building new long positions, offsetting the so-called unwinding of bullish bets by other market participants.
Laurent Kssis, crypto ETF expert at CEC Capital, said this shows that traders have not yet hesitated to go long.
“This assumption is indeed correct. Moreover, more protection strategies are being implemented as the market remains very uncertain. Don’t forget that the late liquidity flush was enough to push the market below the $60k mark. Hesitation in holding long orders is still not dominant, but hedging is a considerable part of the trade.”
Perhaps traders are hoping that once the Mt. Gox compensation and miner selling pressure are exhausted, Bitcoin might resume its upward trend in lockstep with the Nasdaq.
BTC OI weighted funding rate. (Coinglass)
A similar conclusion can be drawn from the persistent contango between futures and spot prices, broadly known as the basis.
“Basis has declined slightly but remains attractive, so there is still demand for long positions as part of basis trades and expectations of a breakout are building as macro tailwinds build and selling pressure may dissipate soon, so strategic longs may be accumulated amid low funding rates.
Activity in the spot and options markets also suggests an upside bias.
Griffin Ardern, head of options trading and research at crypto finance platform BloFin, said cryptocurrency exchange Bitfinex has been a source of bullish pressure during the price drop.
“Bitfinex whales have been buying the dip since late June, but I haven’t observed similar signals in other derivatives markets,” Ardern noted.
Bitfinex’s margin longs, which involve using borrowed funds to buy assets in the spot market, have steadily increased since June.
Margin long position in BTC. (Coinglass)
Meanwhile, traders have been buying upside bets in the options market, according to QCP Capital.
“Despite the sell-off, the options market remains heavily skewed to the upside, suggesting that the market still expects a year-end rally. This is consistent with the significant buying interest observed by the desk for the $100,000/$120 long-dated options,” QCP said in its market update on Wednesday.
