Declining Open Interest Reduces Impact of Liquidations on Spot Prices
Large liquidation events often indicate a local bottom or top in prices, as derivatives traders are forced to unwind their bets due to swift price swings. Liquidations occur when an exchange closes a leveraged position because the trader fails to meet the margin requirements.
In a market update, David Lawant, head of research at institutional exchange FalconX, noted that open interest, which represents the total number of open options and futures contracts held by market participants, has significantly decreased following past large liquidation events. The open interest for BTC and ETH derivatives on major exchanges has dropped approximately 38% from this year’s high and is now at levels similar to those seen in March.
“The strong open interest washout over the past six months suggests that liquidations should have less impact on spot price action,” Lawant stated.
Hot Take: Declining Open Interest May Reduce Price Volatility
The decline in open interest following large liquidation events could lead to reduced price volatility in the cryptocurrency market. As traders unwind their positions, the pressure on spot prices may diminish. This is significant because liquidations have historically had a notable impact on market movements.
With open interest levels approaching those seen earlier this year, it indicates that market participants are adjusting their positions and potentially reducing their exposure to risk. As a result, future liquidation events may have a diminished effect on spot prices.
Overall, declining open interest is likely to contribute to a more stable and less volatile crypto market, offering traders and investors greater confidence in their decision-making.
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