The Open Interest is the amount of funds that are in a contract at one specific moment. If you open a contract then as long as that contract is open it will be counted as open interest. This metric shows us how many contracts there are that still need to be settled. So if from the total market 10 traders are in a long or short position of a total of 100K each, the open interest would be 1,000,000 USD. Traders are using this metric to spot the momentum behind a trend and potential reversals.
The “Open interest” is something a trader can use in many ways. First of all the open interest is a great metric to show the significance of other metrics like the funding rates. When the open interest increases, the funding rates are more significant. Because more contracts are a representation of that specific funding rate (whether positive or negative). Also when the Open interest is high it could mean we are going to see volatility in the markets. The higher the OI, the more volatile the markets can be as there is more liquidity with leverage in the markets.
Traders also use Open Interest to view the momentum behind a certain move. If for example, the price of Bitcoin is going up, a trader would like to see the open interest increase as well. This shows that the momentum is confirming the trend. If let’s say the price of Bitcoin is going up, but the open interest is falling, then it shows there is weakness behind the price increase of Bitcoin and a reversal is more likely. If the price of a cryptocurrency is breaking out but the open interest does not confirm the breakout, the likelihood of a failed breakout becomes more likely.
The Open Interest can be used to spot the momentum behind a trend, reversals, and potential volatility risks in the markets.