Open Interest: Definition, Methods, and Examples

Open interest is an indicator that reflects the total number of active, unclosed contracts on the market, including futures and options. It shows how many contracts for a particular asset are currently in circulation that have not been closed or executed.

In the cryptocurrency sphere, open interest refers to the number of active positions in derivative instruments — futures and options contracts for a specific coin or token. Each contract fixes an obligation to buy or sell a certain amount of cryptocurrency at a predetermined price in the future.

This indicator plays an important role in analyzing market activity and liquidity. An increase in open interest usually signals an influx of participants and increased interest in the asset, while a decrease signals a reduction in trading volume and a decline in trader involvement.

Source: Beincrypto.com

How to analyze open interest

To effectively use open interest in market analysis, it is important to consider it not in isolation, but in the context of other indicators:

1. Compare it with trading volumes. If volume growth is accompanied by an increase in open interest, this signals increased market activity and an influx of new participants.

2. Follow the data from major exchanges. Platforms such as Glassnode, Coinglass, or Dune provide detailed analytics on open positions and help identify trends.

Source: Coinglass3. Use in conjunction with technical indicators. Combining open interest with tools such as RSI, MACD, or moving averages allows for more accurate identification of accumulation and distribution phases.

The role of open interest in shaping market trends

Open interest reflects the total number of active derivative contracts, such as futures and options, that remain active and have not yet been closed or exercised. Simply put, it is an indicator of the number of positions that continue to exist in the market at a given moment.

This indicator helps to understand how strong the current trend is and in which direction it may develop. An increase in open interest usually indicates an inflow of new capital, confirming the stability and continuation of the current price movement. Conversely, a decrease in the indicator often indicates that participants are exiting the market and closing their positions, which may signal a slowdown or a possible reversal of the trend.

For traders, analyzing open interest is a way to assess the level of participant involvement and market liquidity. High values indicate active trading and stable price fluctuations, while low values indicate weakening interest and increased volatility, when the direction of movement becomes less predictable.

Open interest and trading volume

1. Open interest is an indicator that shows the total number of active positions in the market. Its growth indicates an influx of new participants and a strengthening of the current trend.

2. Trading volume — reflects the intensity of transactions over a certain period and the level of liquidity. Increased volume indicates increased interest in the asset and may be accompanied by increased volatility.

How open interest and volume are related:

These metrics are often used together: if trading volume and open interest are both growing at the same time, this usually confirms the strength of the current trend.

Conversely, an increase in volume accompanied by a decline in open interest indicates that participants are closing positions rather than opening new ones.

Impact on market trends:

1. Open interest helps to understand how stable the current trend is and whether it is supported by new money.

2. Trading volume shows the activity of participants in the short term and often accompanies sharp price fluctuations.

Together, these two indicators give traders a more complete picture of the market and help them distinguish between temporary spikes in activity and real trend changes.

Limitations of open interest

Although open interest is a valuable analytical tool, it should not be considered a universal indicator. It has a number of limitations that are important to consider when interpreting the data:

1. No information about the direction of movement. Open interest only shows the number of active contracts, but does not provide an understanding of whether buying or selling prevails. An increase in the indicator can accompany both an upward and a downward trend.

2. Limited information without accompanying metrics. Using open interest alone does not provide a complete picture of the market. For accurate analysis, it should be combined with other indicators — price dynamics, trading volume, market trends, and liquidity levels.

3. Influence of external factors. Changes in open interest can be influenced by news, macroeconomic events, and the general mood of market participants. Therefore, the data should be considered in the context of current conditions.

4. Dependence on contract expiration dates. As the expiration date of futures and options approaches, open interest may fluctuate as traders close old positions or transfer them to new contracts. This can temporarily distort the overall dynamics.

Open interest is a powerful analytical tool, but its effectiveness is only apparent when combined with other methods of analysis and taking into account the context of market events.

In conclusion

Open interest is one of the key indicators of the cryptocurrency market, helping to assess the activity of participants, their sentiment, and the level of liquidity. It serves as an important tool for analyzing the direction and strength of market trends. However, it should not be relied upon alone: this indicator does not reflect all the nuances of price dynamics.

To get an objective picture of the market, open interest should be considered in conjunction with other analytical tools, such as trading volume, price movement, and technical indicators.Sign up and get access to free (for now) 0 to educated investor crypto education crash course.  Telegram | Discord | Twitter (X) | Medium | Instagram 

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The cryptocurrency market operates 24/7/365 without interruptions. Before investing, always do your own research and evaluate risks. Nothing from the aforementioned in this article constitutes financial advice or investment recommendation. Content provided «as is», all claims are verified with third-parties and relevant in-house and external experts. Use of this content for AI training purposes is strictly prohibited.