Bitcoin’s breakout above $60,000 seems to have triggered a new spark of optimism among traders. The market has been flat for most of August after experiencing a significant drop at the beginning of the month, which is why the relatively slight price increase above the $60,000 threshold was enough to inject the market with a significant amount of capital.

This is evident in the spike in open interest between Aug. 21 and Aug. 22. Data from CoinGlass showed that open interest in Bitcoin futures increased from $30.21 billion to $32.08 billion in 24 hours.

Open interest measures the total number or value of outstanding derivatives contracts that have yet to be settled. When analyzing futures, OI is an essential metric as it shows the flow of capital into the market.

A rise in OI indicates that more money is entering the market as traders open new positions. Conversely, a decline in OI shows that contracts are being closed or liquidated, with capital exiting the market. Tracking OI helps gauge market activity and predict potential price volatility.

The $2 billion increase between Aug. 21 and Aug. 22 shows a sudden and aggressive influx of capital into the derivatives market. As the increase follows Bitcoin’s rise from $59,000 to above $60,000, we can safely assume that the price broke a psychologically important level and triggered a new wave of bullish sentiment among derivatives traders. The distribution of calls and puts across Bitcoin options shows that traders are opening new long positions and anticipating further price appreciation.

A similar trend is observed in perpetual futures as well. Perpetual futures OI rose significantly between Aug. 21 and Aug. 22, following a consistent increase over the previous weeks. By Aug. 21, perpetual futures OI had reached $15.66 billion — a substantial increase from $13 billion on Aug. 5.

Perpetual futures are a type of derivative that differs from traditional futures as they do not have an expiry date, allowing traders to hold positions indefinitely. This characteristic makes perpetual futures particularly attractive for speculative trading, as traders can capitalize on short-term price movements without worrying about contract expiration.

The parallel rise in traditional and perpetual futures indicates that the overall market sentiment is bullish, with institutional and retail investors increasing their exposure to Bitcoin. Traditional futures tend to attract more institutional investors, as regulated platforms like the CME see the highest OI and trading volume.

The increase in CME’s OI from $8.76 billion on Aug. 21 to $9.65 billion on Aug. 22 confirms this institutional interest. In contrast, perpetual futures are more popular on platforms like Binance, Bybit, and OKX, which mainly cater to retail traders. The increase in OI on these platforms, particularly the substantial rise on Binance from $6.70 billion to $7.18 billion, indicates growing retail participation.

The difference between traditional and perpetual futures lies in their expiration dates and how they reflect market sentiment. Traditional futures indicate long-term market expectations, as they involve fixed contract periods and often higher capital requirements.

On the other hand, Perpetual futures are more sensitive to short-term market trends due to their lack of expiration and the use of funding rates to keep prices close to the spot price of Bitcoin. Therefore, changes in perpetual futures OI can signal immediate shifts in market sentiment and trader positioning.

The combined increase in both types of futures OI suggests a broad-based bullish sentiment across different investor classes. Bitcoin’s price increase supports this narrative, clearly reflecting the influx of capital into the market.

However, the rapid rise in OI also raises the potential for increased volatility. If the market does not continue its upward trajectory, the large number of open positions could lead to sharp corrections as traders rush to close their positions, especially in the more speculative perpetual futures market.

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This week’s crash has led to some of the highest losses we’ve seen since the collapse of FTX, wiping out billions from the crypto market. Bitcoin’s drop to below $50,000 dramatically affected the futures market, with futures open interest plunging from $31.22 billion on Aug. 5 to $26.65 billion on Aug. 6.

Such a sharp drop in just 24 hours was most likely caused by forced liquidations of futures positions due to margin calls. When Bitcoin’s price drops below critical levels needed to maintain collateral, it usually triggers a cascade of liquidations, and over-leveraged traders have their positions forcibly closed.

The wipeout in futures open interest we’ve seen this week shows that a significant number of traders were betting on Bitcoin’s continued rise and were caught off guard by the sudden downturn, leading to a massive reduction in leveraged positions.

On the other hand, the options market remained relatively stable during the price downturn. Options open interest remained almost flat, fluctuating slightly around $18 billion during the weekend.

Unlike futures, options don’t involve margin calls that can force positions to close immediately. Instead, they give traders the right, but not the obligation, to buy or sell BTC at a predetermined price. This inherent characteristic enables options traders to hold onto their positions without the immediate risk of liquidation, even during periods of extreme price volatility.

However, it’s highly unlikely that the stability in options OI we’ve seen over the past few days was due to traders holding onto their positions.

Options trading volume on Deribit surged from $1.22 billion on Aug. 5 to $4.98 billion on Aug. 6. This is the second-highest options volume ever recorded, topped only by the $5.30 billion in volume the market saw on Feb. 29 this year.

Such a high spike in volume indicates heightened trading activity, where traders are actively engaging in the market. Several factors could have contributed to this phenomenon where open interest remains stable while trading volume increases.

Firstly, during periods of high volatility, traders enter and exit positions more frequently, which means opening new contracts and closing existing ones at a rapid pace. If the number of new contracts opened roughly equals the number of contracts closed, the OI will remain relatively unchanged while the volume spikes. A high turnover of contracts could result from short-term speculation, hedging, or rolling over positions.

An interesting aspect of the options market during this period is the skew towards calls over puts. With over 66% of the options open interest being calls, it shows a bullish sentiment still prevails among traders.

However, while open interest shows a strong bias toward calls, trading volume is skewed toward puts. The 24-hour options trading volume between Aug. 5 and Aug. 6 came from puts. This can be explained by the immediate reactions traders had to the price drop. When Bitcoin experienced a sharp decline, traders likely rushed to buy puts to hedge their existing positions or to speculate on further price declines in the short term.

In contrast, open interest reflects more of traders’ longer-term positioning. Most open interest being calls indicates that traders have built up these positions over time, maintaining a bullish outlook on Bitcoin’s longer-term prospects. These positions are not as quickly adjusted or closed as short-term trades, which is why the open interest remains heavily skewed toward calls.

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Changes in futures and options open interest provide insight into market sentiment, liquidity, and potential price movements. Futures and options reveal how traders position themselves and show their expectations for future price action. Open interest measures the flow of money, showing whether new capital is entering or exiting the market.

Looking at open interest, we can see that Bitcoin’s recent rally has brought new life into the derivatives market, which saw a relatively calm and uneventful July. This stability reflected the weeks of sideways price action the market saw. The lateral trend turned positive last week, as Bitcoin started at $56,680 on July 9. The price increase started slowly but began picking up pace from July 14 onwards, when the price surged from $59,205 to $65,025 on July 17.

Futures open interest closely mirrored this price action. On July 9, open interest was $26.97 billion and rose steadily, reaching $33.25 billion by July 17. This rapid increase in OI shows that traders were opening more contracts as Bitcoin broke $60,000, most likely anticipating further price increases.

The options market followed the same trend. On July 9, open interest was $15.94 billion. It rose steadily over the following week, reaching $20.11 billion by July 17. Like the futures market, a notable spike in options open interest was seen from July 15 onwards, mirroring Bitcoin’s price increase. This surge also shows a significant increase in activity from traders, who rushed to capitalize on price movements.

The distribution of calls and puts shows that over 65% of open interest and volume are calls. This means that a smaller percentage of traders are hedging against downside risks and anticipating further price increases on which they want to capitalize. Options provide a mechanism for traders to leverage their positions with controlled risk, which is particularly attractive during periods of price volatility.

The synchronized rise in both futures and options open interest alongside the price increase shows how integrated the Bitcoin market is. As the spot price rallies, it attracts more futures contracts and prompts increased options activity, indicating a comprehensive response from the market using complex trading instruments.

Furthermore, the correlation between open interest and price shows that the derivatives market loves positive price action. Sideways price action leads to significantly lower open interest in futures and options, while price increases attract new money into the derivatives market.

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The volatility Bitcoin experienced this week had a particularly interesting impact on the derivatives market. Between June 23 and June 27, BTC lost its relatively stable support at above $64,000 and dropped to $60,000, with a brief dip below $60,000 before recovering on June 25.

While the price drop might not seem that significant when looking at long-term price action, a drop below $60,000 is an important psychological milestone for traders. This is why the 6% drop had a notable impact on derivatives. Open interest in Bitcoin futures dropped from $33.33 billion on June 23 to $31.39 billion on June 27, reaching its lowest point since May 17.

The primary reason for this decrease was forced liquidations. As the price fell sharply, a significant number of traders with leveraged long positions likely faced margin calls. Unable to meet these calls in time, their positions were liquidated, which could have added to the selling pressure and led to a further drop in open interest.

This often creates a feedback loop, exacerbating the price decline as liquidations trigger additional sell-offs. Furthermore, the declining price likely prompted traders to become more risk-averse. With heightened volatility and uncertainty, traders might have been discouraged from opening new futures contracts, opting instead to reduce exposure until the market stabilizes.

While the futures market contracted, the options market grew. Open interest in Bitcoin options increased from $20.28 billion on June 23 to $21 billion on June 26, despite a brief dip to $20 billion on June 25.

The increase in options OI during this period suggests that traders turned to options as a hedge against potential price volatility. Options are a flexible tool for managing risk, allowing traders to protect their positions and speculate on price movements without the same risk associated with futures. The rise in OI, particularly in a period of price decline, shows that traders were looking to mitigate risk and position themselves for more volatility.

CoinGlass data shows that most traders are preparing for upward volatility. As of June 27, 65.71% of the options open interest consisted of call options, with the 24-hour volume favoring calls at 57.72%. The clear dominance of call options shows a bullish sentiment prevailing, and traders are positioning for price recovery or looking to capitalize on lower prices with limited downside risk.

Arbitrage opportunities between spot, futures, and options markets could have increased options trading activity. Institutional involvement, with institutions using options for risk management and portfolio adjustments, likely contributed to higher options open interest.

Volatility trading, where traders profit from expected changes in market volatility, also attracted more activity in the options market during this period of increased price swings.

The shifts seen in futures and options open interest show how traders employ different risk management strategies in response to price declines. Futures traders appear to have reduced their exposure due to liquidations and increased risk aversion, while options traders increased their exposure for hedging and speculation.

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While the usual volatility has been absent from the derivatives market, the slight fluctuations seen in the past few days still managed to reveal subtle market trends.

Between June 12 and June 14, Bitcoin options open interest increased $20.85 billion on June 12 to $21.91 billion on June 13, before decreasing to $21.42 billion on June 14.

Open interest in Bitcoin futures also slightly declined during the period, falling from $35.25 billion on June 12 to $34.17 billion on June 14.

The initial increase in options open interest, followed by a subsequent decline, suggests a complex market sentiment when analyzed alongside price. Bitcoin dropped from $69,555 on June 11 to $66,780 on June 14, after a brief recovery on June 13. The predominance of call options (67.17%) over put options (32.83%) as of June 14 indicates an overall bullish sentiment despite the price drop. The 24-hour volume for options on June 14 also leaned towards calls (59.88%), reinforcing this bullish outlook even in a declining price environment.

These subtle changes in OI were a result of a combination of several factors influencing the broader crypto market. Bitcoin ETFs have experienced mixed inflows and outflows in the past several days. The rebound of Bitcoin ETFs with $100 million in inflows, juxtaposed with a sharp $226 million outflow amid Ethereum ETF news, shows just how big of a hit the market took. This outflow likely contributed to the decreased demand for Bitcoin futures, as evidenced by the declining open interest in futures.

The decisive words from SEC’s Chair Gary Gensler that Ethereum ETFs will be approved this summer likely diverted investor attention and capital towards Ethereum, impacting Bitcoin’s derivatives market. This shift is evident in Ethereum’s future and options market, where open interest increases in the past few days reflect this change in sentiment.

MicroStrategy’s convertible note issuance to purchase more BTC also shaped investor sentiment. Michael Saylor’s latest move demonstrates the company’s unwavering confidence in Bitcoin, which can certainly influence investors participating in the derivatives market. This influence is seen in their ability to maintain and increase bullish positions despite a flat price, as seen in the dominance of call options.

ETF outflows have a direct impact on Bitcoin futures and options markets. Outflows from Bitcoin ETFs can lead to reduced liquidity and demand in the futures market, causing a decrease in open interest. This connection is evident from the data, where we observe a decline in futures open interest following significant ETF outflows. The relationship between ETF flows and futures open interest shows how important institutional participation and sentiment are in driving the market.

Bitcoin’s sideways movement and lack of significant volatility during this period have a dampening effect on open interest. When the price remains relatively stable, traders may find fewer opportunities for profit, leading to reduced trading activity and lower open interest in futures. The stable price range of Bitcoin from June 10 to June 14, with minor fluctuations, suggests a period of market consolidation, contributing to the observed decline in futures open interest.

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Bitcoin regained the $66,000 level in the night between May 15 and May 16, recovering some of the losses it incurred in the past week. This spike substantially impacted the derivatives market, significantly influencing both open interest and trading volume.

Futures open interest, which indicates the total value of outstanding futures contracts yet to be settled, experienced a marked increase. On May 15, futures open interest stood at $28.45 billion but surged to $31.18 billion by May 16. This represents a substantial increase of approximately 9.6%. This rise suggests a growing investor interest in Bitcoin futures, driven by the anticipation of further price movements. The rise in OI is essential as it shows an influx of new capital into the market, signaling traders’ expectations and potential price direction.

In the options market, open interest also saw a significant uptick. On May 15, options open interest was $18.43 billion, rising to $20.71 billion by May 16. This increase of approximately 12.4% highlights the heightened activity and interest in options contracts as traders positioned themselves for the price surge.

The distribution of options open interest on May 16, with calls accounting for 66.16% and puts for 33.84%, indicates a bullish sentiment among traders, expecting further upward movement in Bitcoin’s price. A deeper look at the options volume further confirms the overwhelmingly bullish sentiment. On May 16, the volume of call options constituted 58.18%, compared to 41.82% for puts, showing that traders were predominantly betting on the price increase.

Deribit’s daily options volume dramatically increased, jumping from $1.01 billion on May 15 to $2.42 billion on May 16.

The volume and distribution between shorts and longs provide further insights into the state of the market. On May 16, the total liquidations amounted to $150.52 million, with long liquidations at $40.76 million and short liquidations at $109.76 million. The significantly higher short liquidations indicate that many traders were caught off guard by the price increase, resulting in the forced closure of short positions. This liquidation asymmetry reinforces the bullish trend observed during this period, as shorts were squeezed out of the market.

Analyzing the changes in OI and volumes is crucial for understanding how the derivatives market responds to price movements. Once a niche market catering to a small subset of sophisticated investors, Bitcoin derivatives have grown to become a market foundation. The tens of billions in open contracts across products show that derivatives are significant and important enough to affect the broader crypto market. 

Data from CoinGlass indicates a growing bullish sentiment among traders, with a notable preference for call options and a high volume of short liquidations. This behavior suggests that traders are positioning for further price appreciation in Bitcoin. If this bullish sentiment persists and is supported by continued positive price action, we may see further increases in open interest and trading volumes, potentially driving Bitcoin’s price higher.

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