Ethereum open interest peaks, a crash may be imminent

Author: Marcel Pechman Source: cointelegraph Translation: Shan Ouba, Golden Finance

Ether rose 8.8% between October 14 and 15, but the $2,650 resistance level was more challenging than expected. Traders are increasingly concerned that the all-time high in total open interest in Ethereum futures on October 16 may be a warning sign.  

A surge in demand for leveraged ETH positions usually precedes a sharp price correction. On October 15, the total addressable market for Ethereum futures exceeded 5 million ETH for the first time, up 12% from four weeks ago.

On August 2, when Ether’s total open interest last peaked, the price of ETH plunged 31.7% in less than four days, from $3,205 to $2,186. Will history repeat itself this time?

Increased ETH futures demand isn’t necessarily bearish

Increased ETH futures demand isn’t necessarily bearish, so the key insight to draw from this data is whether system-wide leverage is expanding or contracting. The larger the bet, the greater the likelihood of sudden price movements due to forced liquidations.

While derivatives markets may seem like a zero-sum game, their impact on spot prices is significant. This is primarily because futures contracts tend to trade in much larger volumes due to leverage. Additionally, whales and market makers rely on derivatives to quickly hedge risk, a process that is nearly impossible in spot markets due to their lower liquidity.

When forced liquidations of $50 million or more occur in futures markets, arbitrage desks immediately reduce risk in spot markets. This action further accelerates price movements — both up and down — creating an effect known as “cascading liquidations.” This is exactly why traders monitor open interest to spot the risk of excessive leverage leading to unexpected price swings.

On August 2, open interest peaked at 4.75 million ETH, up 15% from four weeks ago. In essence, the current market situation is very similar to the structure in August. A total of $279 million in leveraged long positions were forcefully liquidated - a figure that does not include traders who used stop-loss orders or voluntarily closed their positions during this period.

Other examples include the 4 million ETH open interest on April 1, which was up 21% in four weeks. At the time, the price of Ether started at $3,648 and eventually bottomed at $2,604 on April 13, a 24% drop in 12 days. Therefore, there is enough historical evidence to suggest that peaks in Ether open interest often precede significant price corrections.

Bitcoin and broader market trends may set the tone for ETH prices

While hindsight analysis can more easily identify local peaks in the ETH open interest chart, it is impossible to predict whether the number will continue to grow and exceed 5.1 million ETH. Recent instances of such peaks occurred when the broader cryptocurrency market was moving sideways or experiencing a short-term correction, which adds another layer of complexity to the analysis.

Assuming the overall trend of the cryptocurrency market remains neutral, a 20% to 25% plunge in the price of Ethereum to around $1,960 is entirely possible, so traders should be prepared for this scenario. On the other hand, if Bitcoin eventually breaks through the $70,000 resistance level, the increased use of leverage in Ethereum could favor bullish momentum, which could lead to price appreciation.