Bitcoin open interest soars to one-year high as BTC price rallies toward $68K

Bitcoin (BTC) price gained 8% between Oct. 14 and Oct. 15 the asset is up by 11.5% over the past 30 days. Bitcoin currently is significantly outperforming the S&P 500, which gained 3.8% during the same period. 

However, some traders are concerned that the sharp increase in demand for Bitcoin leverage could pose a potential risk.

Demand for Bitcoin futures has jumped to highest level since 2023

The aggregate Bitcoin futures open interest—which measures the total number of BTC futures contracts—signals a rising appetite for leverage, causing some unease among investors. High open interest can increase the risk of cascading liquidations due to unexpected upward or downward price movements, leading traders to anticipate heightened volatility.

Increased volatility is often a backward-looking indicator, meaning traders wait for days of strong price movements before adding new positions. This delayed response can explain the rise in leverage use, as participants feel more confident entering trades after observing significant price action.

Data shows that the total number of Bitcoin futures contracts reached 566,270 on Oct. 15, the highest level since January 2023. In US dollar terms, the current open interest stands at $38 billion, just 2.5% below its all-time high from March 28, 2024. This marks a clear indication of increased demand for leverage using BTC derivatives.

Considering the relatively strong performance, it’s understandable why Bitcoin investors have increased their positions through derivatives contracts. Additionally, the recent $810 million in net inflows into US-listed Bitcoin spot exchange-traded funds (ETFs) between Oct. 11 and Oct. 14 further fueled the bullish sentiment, signaling increased institutional interest.

In this context, investors often assume that the rise in Bitcoin futures demand reflects growing optimism. However, it’s important to remember that every derivatives contract requires both a buyer and a seller. To determine whether the recent pressure stems from leverage demand from buyers (longs) or sellers (shorts), it is crucial to analyze the Bitcoin futures premium.

Bitcoin monthly futures typically incur a cost due to their extended settlement period, with sellers usually requiring a 5% to 10% annualized premium to compensate for this delay.

The Bitcoin futures premium reached 10% in the early hours of Oct. 15 as Bitcoin’s price spiked to $67,885, but this indicator still failed to surpass the threshold signaling a bullish market. Essentially, despite the temporary surge in demand from leveraged longs, the overall market structure for Bitcoin remains balanced between bulls and bears.

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This data does not rule out the possibility of excessive leverage being employed by participants on either side, which could result in liquidations. However, given that Bitcoin’s price fluctuated by 8.6% on Oct. 15, and derivatives exchanges only forcefully liquidated less than $70 million in BTC futures positions, it suggests that traders are exercising restraint in their leverage use. 

Therefore, the likelihood of cascading liquidations in the short term remains relatively low, despite the increase in BTC futures open interest.