Open interest is defined as the amount of open positions (including both long and short positions) currently on a derivative exchange's BTC/USD trading pairs.
Open interest is defined as the number of open positions (including both long and short positions) currently on a derivative exchange's BTC/USD trading pairs.
A large value of open interest can indicate increased volatility in the price of BTC. For this reason, an open interest chart could also be useful for determining the market tops and bottoms with additional indicators.
- Increasing: Adding liquidity, volatility, and attention + supporting ongoing price trend
As positions and contracts are continuously being opened, it indicates more liquidity, volatility, and attention are coming into the derivative market. Increasing trend in OI could support the current ongoing price trend.
- Decreasing: Exiting liquidity, volatility, and attention
As Open Interest (OI) decrease, it indicates futures contract/ positions are being closed. In turn, this might trigger the possibility of long/short squeeze caused by sudden price movement or vice versa.
We find that open interest (independent variable) and volatility (response variable) are statistically in positive correlation where p-values of F-statistic (for linear model) and the slope are less than 0.001. R-square of the model is estimated as 0.36 where the value is reasonably high considering financial raw data.
The settings for this experiment are the followings:
- We consider date range from '2018-11-05' to '2020-06-01'.
- We resample the data in 15 days to compute volatility.
- Volatility is computed as subtraction of max to min value of every resampled window.
- Values in the above chart are in log form.