Bitcoin Price to Benefit From Record High Open Interest as YTD Volatility Weakens

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After reaching its all-time highest value of almost $67,800 in November 2021, the price of Bitcoin (BTC) has been on the decline ever since.

The pioneering cryptocurrency has halved in value since the start of the year and has demonstrated an overtly bearish trend for much of this period. But things may be starting to turn around.

Recent data collected across a variety of metrics now indicates that Bitcoin’s price bottom is in sight, and the market may be on the cusp of a sharp turnaround. And it appears that the institutional traders have already begun to make their moves.

Bitcoin Open Interest Reaches ATH

Defined as the total number of contracts that are held by market participants and not yet settled, open interest (OI) is often used to gauge market sentiment — with high open interest usually taken as a bullish indicator.

Open Interest for Bitcoin perpetual futures on Binance, the world’s largest cryptocurrency exchange, recently reached its all-time highest BTC-denominated value. This signals strong demand for the cryptocurrency among institutional investors — which remain the dominant force in the Bitcoin market and the main holders of derivatives positions.

According to data from Coinglass, the total open interest in BTC futures now stands at 763,830 BTC (or approx. $14.4 billion). This figure is down 20% YTD, while the price of Bitcoin is down 49% over the same period.

Binance has managed to capture a more than 26% market share, becoming by far the largest and most popular BTC futures exchange.

When considered in combination with changes in volume, open interest can be a powerful tool to identify changing trends in a market. Generally, growing volume and OI in tandem are taken as a bullish signal, whereas a decrease in one or the other is seen as a bearish signal.

It might also be prudent to consider exchange in-flows and outflows alongside open interest. With increasing BTC inflows often taken as a sign of weakened sentiment with holders looking to exit their positions. While increased outflows are seen as a sign of strength, indicating that BTC holders are moving toward a long-term hold stance.

As per data from CryptoQuant, exchange BTC inflows have been on the decline since November 2021, and are currently hovering around 11,800 BTC/day — similar to that seen in December 2020. 

Exchange inflows are now down 76.5% in BTC terms over this period, potentially indicating seller exhaustion is nearing.

Bitcoin Price Volatility Flattens

As an incredibly volatile asset, Bitcoin is known to experience wild price swings over very short time frames. Volatility is usually at its highest close to the peak of a bull market but tends to reduce toward the end of a bear market.

And if data from Kaiko is to be taken into consideration, the end of the bear market may be in the sight.

Bitcoin’s hourly volatility has now fallen to +/- 1-2% — a dramatic reduction from the +/- 3-5% seen when it began its most recent decline in June.

This is further corroborated by data from Glassnode’s Bitcoin Volatility Index (BVIN), which has been on the incline since mid-September.

As a measure of the fair value of Bitcoin variance swaps, the BVIN can be used to indicate the settlement price for BTC volatility futures.

That said, Bitcoin volatility is up in the last week, and may be set to break up soon. This, however, simply means that the BTC price may begin to swing more wildly in the days ahead — it does not indicate the direction of these swings.

This largely correlates with the market’s expectation of how volatility will change in the coming weeks and months. 

As per BTC Options ATM Implied Volatility data from Deribit (and provided by Glassnode), traders have predicted decreased short and long-term volatility from September onwards.

By speculating on Bitcoin’s volatility through variance swaps, traders can net a profit by correctly predicting whether its volatility will increase or decrease over a given time period. 

It can also be used to hedge against volatility and is a commonly used tool among sophisticated traders.

Whereas for many casual and professional investors, reduced volatility implies reduced risk, potentially making BTC more attractive for those sitting on the fence.

Bitcoin Price Holds Crucial Support

After collapsing from over $46,000 to under $20,000 between January and June 2022, Bitcoin has remained around this price point ever since — briefly hitting a low of $18,387 in September.

Hovering between the $18,400 and $20,000 range for the better part of a month, Bitcoin has yet to fall through the $18,700 support with any momentum. Despite testing the $19,000 threshold seven times in the last six months, the price of Bitcoin has so far failed to close under it on the monthly timescale.

That said, Bitcoin has historically fallen by as much as 84% between the peak of a bull run and the trough of the subsequent bear market.

Should this figure hold true again, then Bitcoin could bottom out at as low as $11,000 before resuming an uptrend. 

That said, few can argue that the macro-economic environment isn’t worse this time around — with most countries braced for recession and still reeling from the economic consequences of the COVID-19 pandemic and rising interest rates.

As we previously touched on in our recent Bitcoin price bottom analysis, several key indicators suggest that the bottom is either in, or it’s imminent — including the novel digging method and well-established Mayer Multiple and Rainbow indicators. 

This could mean that a characteristic sharp drop to a local bottom could be followed by a major price rally — potentially one final display of major volatility to close out this bear market.

The average bear market lasts 289 days (around 9.6 months) and Bitcoin’s bear market arguably started in early January 2022. Should the average duration hold true, then Bitcoin could be due for a choppy time in the weeks ahead, before recovering strongly from late October onward.