##What Is Open Interest In Bitcoin Futures And How Traders Use It?

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Bitcoin futures contracts allow traders to speculate on the price of Bitcoin without necessarily have to own it. They are a derivative product that gained serious popularity in the past years.



Traders are always looking for information that would give them an edge in the market. Arguably, the most valuable data is that which offers an insight into what other traders are doing.




Open Interest (OI) could provide some of this information with appropriate interpretation. Understanding it and its impact on the Bitcoin’s price could help traders make better decisions.



Open Interest And Trading Volume


The overall trading volume and open interest are somewhat related concepts. While the volume accounts for all of the contracts that have been traded in a given period, open interest only considers the total number of open positions by market participants at any given time.




Open interest is calculated by summing up all the opened positions, regardless of whether they are long or short, and subtracting those that have been closed.




Evidently, the open interest increased from 1 to 13 as traders place new positions. However, as Alicia closed a position of 3 BTC, the open interest declined. This above example shows how open interest changes depending on the number of open contracts.





Why Does Open Interest Matter In Bitcoin Trading?
In legacy markets, traders monitor the changes in open interest closely. Analysts typically use it as an indicator to pinpoint the strength behind price trends and market sentiment.




Open interest is indicative of the capital flowing in and out of the market. If more capital flows to Bitcoin futures, the open interest will increase. However, if the capital flows out, the open interest will decline.




Hence, increasing open interest is indicative of a bull market, whereas if it decreases, this signals a bear market.



Usually, analysts monitor the correlation between the asset’s price, volume, and open interest to analyze the current market sentiment. The following table shows the interpretation of market behavior based on the changes in the above factors.




Open Interest And Its Correlation To BTC Price


Looking at the historical performance of Bitcoin’s price regarding its open interest, there is an evident positive correlation. Data from the widespread monitoring resource Skew tracks the open interest for Bitcoin futures since the beginning of the year. Below is a chart that reveals how it relates to the price.