As Bitcoin (BTC) recovers from recent lows of around $52,500, open interest in the digital asset is rising much slower than the asset’s price.

Bitcoin Relief Rally Could Be Spot-Driven

Cryptocurrency trader and investor Daan Crypto made an interesting observation about Bitcoin’s open interest and the asset’s price action. In a post published on X, the crypto trader noted that Bitcoin’s open interest lags behind the asset’s price. 

According to the post, while the BTC price is up 8.69% from its recent lows, the commensurate open interest is up 5.50%. The difference in the rise of BTC price and open interest could have multiple implications regarding the market’s health.

Daan Crypto points out:

This is generally good as it shows there’s not as much positioning by longs chasing price and that the move is primarily spot led. Need it to stay that way to get a sustainable move up.

Per data from cryptocurrency futures trading and information platform CoinGlass, total open interest tied to Bitcoin currently stands at almost $30 billion, with slightly over $45 million worth of positions liquidated in the past 24 hours. Since the BTC price has been on an uptrend since yesterday, most of those liquidated were likely holding short positions.

What Implications Does Open Interest Hold For Bitcoin Price?

Open interest indicates the total volume of outstanding contracts or positions held by market participants in futures or options markets. Suppose the underlying asset is experiencing a bullish momentum.

In that case, any drawdown in price is typically followed by a significant increase in open interest, indicating that market participants are long and expect the asset to continue its upward trajectory.

The opposite holds during a bearish momentum, when any short-lived rise in the asset price is followed by a rise in open interest, typically indicating that traders are holding a short position and expect the asset to tumble further.

In the context of the current Bitcoin price momentum, the relatively small increase in open interest could signal that speculators are not too keen on longing the asset just yet, implying that the price increase could be driven by organic demand in the spot market.

Typically, a spot-led rally is considered healthy for a sustainable rise in price as it reflects organic buying interest rather than speculators hoping to make a quick profit through short-term leverage trading.

In addition, a spot-led rally implies a reduced likelihood of liquidation cascades that can have a domino effect on the underlying asset’s price, resulting in significant drawdowns.

It also means that long-term investors view Bitcoin as undervalued according to current market prices and are taking advantage of the lower prices to accumulate BTC.

Bitcoin trades at $56,762 at press time, up by 2.1% in the past 24 hours. The total crypto market cap stands at almost $2.10 trillion, according to data from CoinGecko.