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Open interest is a traditional term used to quantify the total dollar value of investor positions in a futures contract. These positions can be either long or short. For example, imagine a Bitcoin futures contract just opened and Alice goes long $100. At this point both the volume and open interest are equal to $100. Then, Alice decides that she wants to sell half of her position. Therefore, by closing haf of the market’s outstanding positions open interest decreases to $50, while volume increases to $150.
Open interest aggregates all positions and gives traders an idea of the dollar amount that is at stake for a particular contract. For perpetual swaps the open interest can be held for an indefinite amount of time, whereas for futures contracts the open interest goes to zero by the point a contract expires and usually starts decreasing a few weeks prior to the settlement date.
Futures Open Interest for Bitcoin (December 25, 2020 contracts)
Similar to volume, open interest can be used to assess trend strength. For instance, if open interest increases as price increases, it points to more longs being opened. On the contrary if price increases and open interest decreases, it points to weakening of the trend as derivatives traders positions are being closed.
Therefore, the example above points to strong conviction among perpetual swaps traders as the amount of open positions increased along with Bitcoin’s price.
Last modified 3yr ago