What Is Open Interest (OI)

Open interest (OI) is the total number of outstanding derivative contracts—such as futures or options—in a market that has not yet been settled or closed. It provides a snapshot of the current level of market activity and investor commitment. 

Traders can then use these snapshots to speculate on the future price of a cryptocurrency without actually owning the underlying asset. 

Open interest is a valuable metric for assessing market sentiment and liquidity. It tracks the number of open positions in a particular contract, providing insights into the level of active participation and potential price trends. By analyzing changes in open interest, traders can gain a better understanding of market dynamics and make more informed trading decisions.

How Does Open Interest Work?

Open interest is a lagging indicator, meaning it reflects past market activity rather than predicting future price movements. It is calculated by adding up all the open contracts in the market at a specific point in time.

Open interest is influenced by the actions of market participants. When a new buyer and new seller enter a trade, a new contract is opened, increasing the open interest. Conversely, when a buyer and seller close out their positions, a contract is closed, and the open interest decreases. Simply transferring a contract from one party to another does not affect the open interest, as the total number of contracts remains the same.

As seen above, open interest provides a snapshot of the current level of market participation and commitment. A rising open interest suggests increased activity and potential bullish sentiment, while a declining open interest may indicate decreasing participation and potential bearish sentiment.

By analyzing changes in open interest, traders can gain insights into market sentiment and potential price trends. For example, a sustained increase in open interest alongside rising prices can suggest a strong underlying bullish trend. In contrast, a sudden decrease in open interest might foreshadow a potential trend reversal.

What Does Open Interest Tell You?

Open interest can provide valuable insights into market sentiment and potential price trends, helping traders make informed decisions and manage risk effectively. By analyzing open interest data, traders can:

• Identify Trends: A sustained increase in open interest can suggest a strong underlying trend, while a decrease in open interest may indicate a potential reversal.

• Assess Market Sentiment: High open interest can indicate strong bullish sentiment, as it suggests that many traders are holding long positions. Conversely, low open interest can suggest a bearish sentiment, as it may indicate that many traders are closing their positions or not entering new ones.

• Identify Overbought or Oversold Conditions: Sudden spikes in open interest can indicate a potential overbought or oversold market, which may present opportunities for contrarian trading strategies.

• Monitor Liquidity: High open interest generally indicates a more liquid market. As more buyers and sellers are willing to trade, this can benefit traders, as it allows them to enter and exit positions more easily.

Open Interest Chart: What Is It, and How Do You Read Them?

Most crypto perpetual futures contracts include an open interest chart as part of their trading interface. Crypto charts like this provide a visual representation of the open interest data, allowing traders to easily track and analyze changes in open interest over time.

OFFICIAL TRUMP (TRUMP)’s perpetual futures contract, with the open interest chart at the bottom

The open interest chart typically displays the open interest level on the y-axis and the time period on the x-axis. The chart is often presented as a line graph, with spikes and valleys representing fluctuations in open interest.

How to Read an Open Interest Chart:

• Trend: Identify the overall trend of the open interest line. An upward trend suggests increasing buying interest and potential bullish market sentiment, while a downward trend suggests decreasing buying interest and potential bearish sentiment. Traders can use this information to confirm the strength of the current trend or anticipate potential reversals.

• Breakouts: Look for significant breakouts in open interest above or below key resistance or support levels. These breakouts often precede or confirm price breakouts, indicating a potential shift in market sentiment and a possible acceleration of the trend.

• Divergences: Pay attention to any divergences between the open interest chart and the price chart. If the price is making new highs while open interest is declining, it could signal a weakening trend and a potential reversal. Conversely, if the price is making new lows while open interest is increasing, it could suggest strong buying pressure and a potential upward reversal.

• Volume: Observe the volume of open interest in relation to trading volume. Increasing open interest alongside rising trading volume generally indicates a healthy and strengthening trend. Conversely, declining open interest with decreasing trading volume might suggest a weakening trend and potential exhaustion.

Positive vs. Negative Open Interest

Open interest can act as a leading indicator of price trends, providing valuable insights into market sentiment and potential future movements. By analyzing changes in open interest, traders can identify potential buying or selling pressure and anticipate potential reversals or continuations in trends.

• Positive Open Interest: A positive open interest indicates that there are more buyers in the market than sellers, suggesting a bullish sentiment and potential for upward price movement.

• Negative Open Interest: A negative open interest indicates that there are more sellers in the market than buyers, suggesting a bearish sentiment and the potential for downward price movement.

It's important to note that open interest is just one indicator among many and should be used in conjunction with other technical and fundamental analysis tools to make informed trading decisions.

Can Open Interest Be Zero(0)?

Open interest can theoretically reach zero if all outstanding contracts are closed. In this case, it would indicate that there are no open positions in the market, meaning that no traders are currently holding any futures contracts for the asset.

A zero open interest scenario is unlikely in most active markets, as there will always be some level of buying and selling activity. However, it can occur in less liquid markets or during periods of extreme market volatility.

If the open interest for a particular asset reaches zero, it suggests that traders are not interested in buying or selling contracts at the current price level, indicating a lack of confidence in the market or a lack of clear direction.

How to Interpret Zero Open Interest:

If you encounter a futures contract with zero open interest, it's important to consider the following:

• Market Liquidity: A zero open interest may indicate low liquidity in the market, making it difficult to trade the asset.

• Lack of Interest: It could also suggest that traders are not interested in trading the asset at the current price level, potentially due to uncertainty or unfavorable market conditions.

• Potential Reversal: If the open interest for a previously active contract suddenly drops to zero, it could signal a potential reversal in market sentiment.

Open Interest vs. Trading Volume

Open interest and trading volume are two important metrics used to analyze market activity in futures markets. Understanding the difference between these two metrics can provide valuable insights into market sentiment and potential price trends.

What is Trading Volume?

Trading volume refers to the total number of contracts traded in a market over a specific period. It measures the total amount of activity in the market, regardless of whether the trades were opened or closed.

For example, if 1000 Bitcoin futures contracts are traded in a day, the trading volume for that day would be 1000 contracts.

Trading volume can be a useful indicator of market liquidity and interest. High trading volume suggests increased market activity and buyers and sellers are actively trading the asset. Low trading volume, on the other hand, may indicate a lack of interest or liquidity.

Difference Between Trading Volume and Open Interest

Open interest and trading volume are often confused with each other, but they represent different aspects of derivatives market activity.

• Open Interest: Open interest measures the total number of outstanding contracts in the market that have not yet been settled. It reflects the total number of open positions in the market and can be used to gauge market sentiment and potential price trends.

• Trading Volume: Trading volume measures the total number of contracts traded in the market over a specific period. It reflects market activity level and can be used to assess liquidity and market interest.

How to Trade Cryptocurrencies on Flipster

1. Sign up for an account on the Flipster website or by downloading the Flipster app (Android or Apple).

2. Click the [Trade] tab.

3. Search for your preferred cryptocurrency and click on it.

4. Select the leverage (up to 100x).

5. Select either a Trigger Order or Market Order.

6. Enter the amount of coin you want to trade or choose a percentage of your available funds.

7. Once you have confirmed the details, click the [Long] or [Short] button to open a position.