Futures contracts exist when investors purchase the right to either buy or sell units of an asset at a later date with a fixed price. The concept allows for the prediction of future pricing and rewards for that pricing without actually owning the underlying asset.
All future contracts exist between a buyer and seller as an agreement to purchase at a later time. Open interest in those contracts reflects the total number of contracts that have not been concluded with a sale.
Bitcoin’s Open Interest Woes
The open interest in Bitcoin exploded in May, with the potential for a decline in the dollar and a move to safe-haven assets. This drove investors into the futures market, as many saw a healthy outlook for Bitcoin.
Short sellers (those who bet the price would decline) were handed a significant blow when the price soared in early August. For long futures positions, the month has been strong.
However, Bitcoin’s previous ATH occurred in late February, just before the COVID-19 crisis. The subsequent collapse in open interest reflected a considerable number of positions closing, as shorts tried to cover losses.
Long and Short of Things
The new ATH in open interest contracts represents another substantial bet on future pricing. However, open interest does not reflect the overall position, whether short or long.
With the market moving rapidly, and the overall economic outlook bleak, open positions add little to price prediction. However, while not providing insight into the price, the statistic does relate to market activity.
For Bitcoin, adoption and mainstream awareness is far more important than small changes in price. Long term awareness and acceptance of the coin as a viable asset will likely have a greater impact than short term trading.