Bitcoin Price to Benefit from Record Open Interest as YTD Volatility Weakens

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After hitting its all-time high of almost $67,800 in November 2021, the price of Bitcoin (BTC) has been falling ever since.

The pioneering cryptocurrency has halved in value since the beginning of the year and has been in an openly bearish trend for much of this period. But things may be starting to change.

Recent data compiled across a variety of metrics now indicates that a Bitcoin price bottom is in sight, and the market may be on the cusp of a sharp reversal. And it appears that institutional traders have already started to make their moves.

Bitcoin open interest hits ATH

Defined as the total number of contracts held by market participants and not yet settled, open interest (OI) is often used to gauge market sentiment, with high open interest generally taken as a bullish indicator.

The open interest for Bitcoin perpetual futures on Binance, the world’s largest cryptocurrency exchange, recently hit its all-time high value denominated in BTC. This indicates strong demand for cryptocurrencies among institutional investors, who remain the dominant force in the Bitcoin market and major derivatives position holders.

According to data from Coinglass, the total open interest in BTC futures is now 763,830 BTC (or roughly $14.4 billion). This figure is down 20% YTD, while the price of Bitcoin is down 49% over the same period.

Binance has managed to capture a market share of over 26%, becoming by far the largest and most popular BTC futures exchange.

When considered in combination with changes in volume, open interest can be a powerful tool for identifying changing trends in a market. Generally, rising volume and OI in tandem are taken as a bullish signal, while a decline in one or the other is seen as a bearish signal.

It might also be wise to consider currency inflows and outflows along with open interest. With rising BTC inflows often taken as a sign of weakened sentiment with holders looking to exit their positions. While rising outflows are seen as a sign of strength, indicating that BTC holders are moving into a long-term hold posture.

According to data from CryptoQuant, BTC trading inflows have been declining since November 2021 and are currently hovering around 11,800 BTC/day, similar to what was seen in December 2020.

Swap entries are now down 76.5% in BTC terms over this period, which could indicate seller exhaustion is approaching.

Bitcoin price volatility flattens out

As an incredibly volatile asset, Bitcoin is known to experience wild price swings in very short periods of time. Volatility is usually at its highest near the peak of a bull market, but tends to taper off towards the end of a bear market.

And if Kaiko’s data is taken into account, the end of the bear market may be in sight.

Bitcoin’s hourly volatility has now dropped to +/-1-2%, a dramatic reduction from the +/-3-5% seen when it began its most recent decline in June.

This is further corroborated by data from Glassnode’s Bitcoin Volatility Index (BVIN)which has been on the rise since mid-September.

As a measure of the fair value of Bitcoin variance swaps, the BVIN can be used to indicate the settlement price of BTC volatility futures.

That said, Bitcoin’s volatility increased in the last week and it may break soon. However, this simply means that the price of BTC may start to swing more violently in the coming days; it does not indicate the direction of these changes.

This largely correlates with the market’s expectation of how volatility will change in the coming weeks and months.

Based on BTC Options ATM Implied Volatility data from Deribit (and provided by Glassnode), traders have forecast a decline in short-term and long-term volatility beginning in September.

By speculating on the volatility of Bitcoin through variance swaps, traders can profit by correctly predicting whether its volatility will increase or decrease over a given period of time.

It can also be used to hedge against volatility and is a commonly used tool among sophisticated traders.

While for many casual and professional investors, reduced volatility means reduced risk, which could make BTC more attractive to those feeling indecisive.

Bitcoin price has crucial support

After collapsing from over $46,000 to under $20,000 between January and June 2022, Bitcoin has hovered around this price point ever since, briefly hitting a low of $18,387 in September.

Oscillating between the $18,400 and $20,000 range for the better part of a month, Bitcoin has yet to break through the $18,700 support with any momentum. Despite testing the $19,000 threshold seven times in the last six months, Bitcoin price has so far failed to close below it on the monthly timescale.

That said, historically, Bitcoin has fallen as much as 84% ​​between the peak of a bull run and the trough of the subsequent bear market.

If this figure proves true again, then Bitcoin could bottom as low as $11,000 before resuming an uptrend.

That said, few can argue that the macroeconomic environment is not worse this time around, with most countries primed for recession and still recovering from the economic fallout from the COVID-19 pandemic and rising interest rates.

As we mentioned earlier in our recent Bitcoin price minimum analysisseveral key indicators suggest bottom is in or imminent, including the novel excavation method and the well-established Mayer Multiple and Rainbow indicators.

This could mean that a characteristic sharp drop to a local bottom could be followed by a large price rally, potentially a final display of high volatility to close out this bear market.

The average bear market lasts for 289 days (around 9.6 months) and the Bitcoin bear market could be said to have started in early January 2022. If the average duration holds then Bitcoin could have a rough time in the coming years. weeks, before recovering strongly from the end of October. ahead.

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