Big Spike in Bitcoin Open Interest

Bitcoin is the modern era's #1 speculative trading asset.  But the public mood waxes and wanes concerning enthusiasm toward Bitcoin, just like any other type of speculative vehicle.  There is nothing like seeing Bitcoin prices zooming up to new all time highs to get everyone excited, and that excitement shows up in traders deciding to play in the Bitcoin futures market.  Participation in a particular futures market is measured using data on "open interest", which refers to the total number of futures contracts existing at any given moment.  Every futures contract is simultaneously 1 long position and 1 short position, held by different parties.

In December 2024, as Bitcoin prices were topping, there was an enormous spike up in the total open interest of "micro Bitcoin" futures.  This is a smaller contract than the regular Bitcoin futures traders, with lower entry requirements for traders.  Because of that, the micro Bitcoin contract tends to attract more of the hot money small traders.

One interesting point about these futures contracts is that they attract a lot more attention at interesting turning points for Bitcoin prices.  The micro Bitcoin futures contract has only been around since early 2021, but during that time there has been a fairly strong correlation between spikes in open interest and peaks in prices.  Or at least that how it usually works.  In November 2022, there was an interesting anomaly when we saw an upward spike in micro Bitcoin futures open interest but it marked an important bottom for prices.

What I find noteworthy about this most recent spike is that it has seen an immediate drop right afterward.  I label this as point C in the chart above, and it resembles a couple of other similar episodes, points A and B, when there was a big spike in open interest and then an immediate drop.  Point A marked the debut of BITO, the first ETF for trading Bitcoin which was designed to hold Bitcoin futures.  That is different from the whole recent crop of spot Bitcoin ETFs which hold actual Bitcoins, but launching BITO was at least a start for ETF traders.  And the moment of its debut famously marked an important top in Bitcoin prices.

When the spot Bitcoin ETFs came along in early 2024, many people thought that moment would also mark an important price top.  That effect happened, but it was delayed by a couple of months.  Point B marked the moment of speculative climax.

Points A and B comprise a sample size of only 2, so it may be dangerous to extrapolate too much meaning from them.  But the important point was that each instance saw a big spike in open interest, and then an immediate big drop.  And each instance marked the entry into a significant corrective period for Bitcoin prices, which we are likely seeing again now here at point C.

This next chart looks at total open interest in the regular (larger) Bitcoin futures contract, which has been around for longer than the micro one.

The same principle applies here in that spikes in open interest usually mark important price tops.  But if you look closely you can find at least a couple of instances when there were open interest spikes that marked meaningful bottoms, including that same one in November 2022 discussed above.  The difference in this lower chart is that while there was also a big drop after the highest point for open interest, it did not close out quite as many contracts all at once as what we saw in the micro contract.  But it was still a top-worthy spike.