What is open interest? The trading minute

Battlefield radiography. Even before looking at a price chart, an experienced trader wants to know how much money is at stake in the derivatives markets and which way it leans. Open interest answers the first question, while the funding rate addresses the second. Today, we tackle the former, this indicator that everyone cites but few beginners truly know how to read.

Open interest: the definition that counts the still open bets

Open interest (literally "open interest", also referred to as open positions) measures the total number of derivative contracts still alive at a given moment, those that have neither been closed nor liquidated. It is expressed in dollars or bitcoins depending on the tools. Each contract relies on a buyer and a seller, and as long as neither has settled their bet, it remains counted.

Beware of the classic trap. Volume measures the activity of a day, while open interest measures a stock of commitments that accumulates. A market can churn billions in volume without open interest moving, if traders are merely passing through. Conversely, increasing open interest signals that fresh money is entering, often with leverage. The larger the stock of bets grows, the more fuel is available for a violent movement, in either direction.

November 2021, the record open interest that signaled a hangover

Back to the peak of the last major cycle. In mid-November 2021, just days after Bitcoin's ATH of $68,982, the open interest of BTC futures reached a record of about $24 billion, according to Coinglass data reported at the time by the specialized press. Translation: never before had so many leveraged bets been piled on Bitcoin, at the precise moment when the price was peaking.

You know the rest. The market turns, long positions get crushed one after another, and this record open interest deflates for months at the pace of liquidations, the very ones that fuel long squeezes. A peak open interest did not predict the date of the reversal. It indicated, black on white, that the market was running on full leverage and that a spark would suffice.

Reading open interest like a retail trader

The trick lies in the crossover with price. Price rising with increasing open interest, the trend attracts fresh money and feeds itself. Price rising while open interest melts away, caution, as this often indicates sellers buying back their positions rather than real demand. The same gymnastics applies to the downside. There’s nothing magical about it, just contextual information, which is free on aggregators like Coinglass.

One last word to broaden the scope. This logic of counting commitments is not new to crypto; commodity futures markets have practiced it for over a century, and the weekly reports from the U.S. CFTC make it a pillar of classic futures analysis. The crypto trader who learns to read open interest alongside the order book speaks the same language as Chicago, just with a bit more leverage around them.