Unraveling the $7 Billion Drop in Bitcoin’s Notional Open Interest

Open interest in bitcoin (BTC) futures and perpetual futures, a key indicator of market sentiment, has seen a decrease of about 18% from $37 billion to $30.2 billion over the course of a month. This decline coincides with a 14% drop in the spot market price of the cryptocurrency, as reported by data provider Coinglass.

Initially, this data might suggest that long positions or leveraged bets anticipating a price increase have been closed out in the past four weeks. Essentially, the decrease in BTC’s price is supported by the unwinding of optimistic bets.

However, this interpretation may only be partially accurate and might obscure the bullish trends present in the market. Open interest represents the number of active contracts at a particular time, while notional open interest is calculated by multiplying the units in a contract by its current spot market price. Consequently, changes in the asset price can impact notional open interest even if the total number of contracts remains constant, potentially painting a misleading picture of market activity.

This scenario seems to be playing out in the BTC market. Coinglass data shows that open interest has stayed above the 500,000 BTC threshold for over four weeks. Concurrently, perpetual funding rates, which exchanges charge every eight hours, have consistently remained positive, indicating a preference for bullish positions.

The combination of stable open interest in BTC terms, positive funding rates, and the decline in notional open interest suggests that some traders are establishing new long positions, countering the supposed unwinding of bullish bets by other market participants.

This trend is reflected in the ongoing activity in the spot and options market, which also indicates a bias towards the upside. Bitfinex, a crypto exchange, has been a source of bullish pressure during the price decline, with margin longs on the platform steadily increasing since June.

As the market awaits the exhaustion of selling pressure from Mt. Gox reimbursements and miners, there is hope among traders that bitcoin could resume its upward trajectory, potentially aligning with the Nasdaq’s performance.

In conclusion, despite recent market fluctuations, there remains an overall positive sentiment towards bitcoin’s future price movements, with traders positioning themselves strategically for potential market shifts.