I was browsing around crypto news and i came across a post/news article.
I post to try educate and this was a great example to use as a learning experience.
This is mostly for newer traders who are more susceptible to making uninformed or misinformed decisions.
This post will show why you should not take Crypto news/posts(Hype or FUD) at face value, even when you read them on trusted sites.
Before we start, what is open interest?
Open interest is the total value of open positions or position that have not been offset in the futures markets on crypto exchanges, this is long and short positions.
Example,
If you have $1000 and you open a long/short trade on BTC(futures)using 10x leverage you would be adding $10 000 to the open interest while that trade is open.
If you purchased $1000 worth of BTC via spot this would not count as open interest, this would be trade volume.
This is the post👇(July 29th)
I have underlined all the parts of this post that most uninformed Crypto traders would use for confirmation of huge Bullish price movement to come.
The first and most important part of how this post could be recieved by new or uninformed crypto traders are the words "suggests imminent price breakout"
This post is by a well known crypto news source, cointelegraph, it is also shared all over the web, i read this post on Tradingview for example.
Please note that this post made no mention of how BTC price reacted when reaching this level of open interest in the last few months.
For some reason the chart shown in the post has also unselected the BTC price.
Lets go to coinglass and see the chart, exact same one they used in the post.
With the BTC price they for some reason decided to not include👇
Ok so lets do some research and see how accurate that post is or if it could be considered misleading
The post mentions previous all time highs(open interest) on the 29th March 2024 (it was actually the 28th march but anyways)
Lets see how high levels of open interest have effected BTC price over the last few months.
29th March 👇
Lets look at other examples.
This is the exact same chart used for that post, you can find it on coinglass.
You can see by the yellow line how BTC price has reacted to high open interest in the following days.
If you want to see the same on the charts👇
In all cases of high open interest since March 29th(the date listed in the post) the BTC price has fallen in the days that follow.
Why should an imminent price breakout, based on open interest, happen now? (As suggested in the post)
If you were an uninformed Crypto trader and read that post you could easily be misled, that post is by a trusted source, also shared on other trusted platforms like tradingview, it could easily be used as "proof" of Bullish sentiment and a reason to open long positions.(Possibly with high leverage)
Most new crypto traders have no idea what open interest is, most of these articles are either clickbait with cherry picked info or they are posted for the sole intention of influencing your decisions(PsyOp).
This is done a lot and the more you understand the more you notice it.
This post is solely for education, i am not predicting price movement or saying you should based on this post.
The point of this post is to show that you need to question information you read, this is more important if you are new to crypto and this information could influence your trading decisions.
If you read a post and find yourself wanting to invest based on it, first ask yourself if you understand what it means, if you dont then take the time to learn, the knowledge will stay with you and will help you in the future.
If you keep doing this then slowly but surely things will start making more and more sense.
Final thoughts,
There are ways to use open interest in your trading strategy but high levels of open interest alone can not be used as confirmation of price direction, arbitrage and other factors could add to open interest but not have much effect on price direction.
An example of this would be if a large holder purchased $10 million worth of BTC on binance(spot) at $61 000(not open interest) and then shorted BTC at 1-1 for $10 million on coinbase if the price was $61 250(Open interest), they would be taking advantage of price difference(arbitrage) but this would add $10 million to the open interest, the short is futures and the spot is not, the effect on BTC price would be basically nothing but the open interest would be effected by $10 million.
Thanks for reading.
Peace
