What is Open Interest? 

Open interest is the total number of open positions held by market participants. Open interest sums the total number of contracts (both short and long) that are opened by the market participants and subtracts the number of contracts that are closed. 

For example, if Sally opens a long position on BTC for 4 contracts, the open interest increases by 4. If Joy opens a short position of 5 contracts for BTC, open interest increases again by 5. When Jon opens a short position on BTC for 2 contracts and a long position on BTC for 3 contracts, open interest increases by another 5. Making a total increase of 14 contracts. 

The next day, Jon decides to close his BTC long position, this reduces open interest by 3. Joy gets stopped out of her short position of 5 contracts as well. As a result, the total change in open interest is -8. 

What does Open Interest tell? 

Open interest however should not be confused with Volume, as open interest only considers when new positions are open and closed while volume counts all contracts that have been traded. In a way, open interest can be seen as the amount of money flowing in and out of markets. On the other hand, volume is the cumulative amount of money exchanged during the day, this could be the amount of money exchanged between hands for the same one open contract during the day. 

As it shows the amount of new money flowing in, open interest is useful in understanding the strength of the market during certain price moves. It can also signal when certain trends are losing momentum. During lull periods, open interest can show when markets beginning to breakout of its range. 

Aggregated Open Interest indicators 

Aggregated Open Interest indicators are one of Coinalyze’s tools that can be used to analyze markets and trade like a pro. As mentioned in our previous article on Predicted Funding Rate, the Aggregated open interest indicators are versatile ones that can be used with other indicators. There are three aggregated open interest indicators on Coinalyze:

• Aggregated Open Interest. This indicator is denominated in USD. The indicator takes all futures and perpetuals contracts open interest for a certain asset across multiple exchanges and aggregates them. This includes both stablecoin-margined contracts (converted to USD) and coin-margined contracts which are already denominated in USD.
• Aggregated Open Interest COIN-margined Contracts. This indicator is denominated in USD. This indicator only aggregates the contracts that are collateralized by the base asset (Note: some exchanges allow the collateral to be other assets not only the base asset). These contracts are also known as inverse contracts.
• Aggregated Open Interest STABLECOIN-margined Contracts. This indicator is denominated in COIN. For BTC for example it is denominated in BTC, for ETH it is denominated in ETH and so on. This indicator only aggregates the contracts that are collateralized by stablecoins. These contracts are also known as linear contracts.

All those three indicators allow users to select which contracts to be included in the aggregation, as can be seen on the Bitcoin Open Interest indicator for example. That gives users a high degree of flexibility.

Trading with Aggregated Open Interest indicator

Aggregated Open Interest can be used to understand the strength of a trend when trading. For example, in the graph bellow, the blue arrows show the decline in aggregated open interest as price made a similar high, this suggests that price strength is declining and there is little upside left. This can be seen when we look at the Bitcoin Open Interest chart where price declines after the second peak. The yellow lines also show this pattern. As price made a higher high, open interest made a lower high, suggesting weakening in strength. Later on this can be seen in the sharp decline in price. 

Other ways of looking at the Aggregate Open Interest indicator is by looking at its trend over large time periods to observe where the market is moving. For example, in the Bitcoin Open Interest chart, we see that OI is forming an upward trend as indicated by the line in blue. At the same time, BTC price seems to have found strong support at the price level of 18.6K. Furthermore, when price touches its support line the same time OI touches its support line. This tells us that OI increases at this key support level and that markets are consolidating at 18.6K. 

Trading with Aggregated Open Interest COIN-margined Contracts indicator

As described already this indicator only aggregates the contracts that are collateralized by the base asset(mainly). This indicator is good at looking at flows between spot and futures. When combining CVD indicator and COIN-margined OI indicator, we can see that deviations between this two indicators lead to a sharp drop in price. From the two charts, CVD moves down, and Aggregate COIN-margined OI indicator moves up, when this happens a sharp drop tends to follow. This can be understood as major spot flows selling off, while some traders are getting too confident by using their spot holdings as margin. These traders will get liquidated and contribute to more selling of their collateral. Hence, a deviation between the two indicators can be an early signal of a potential sharp fall. 

Trading with Aggregated Open Interest STABLECOIN-margined Contracts indicator

As described already this indicator only aggregates the contracts that are collateralized by stablecoins. This is the majority of contracts and would show the major flows. This indicator is denominated in COIN. In the chart below, it can be seen that the indicator can be used to anticipate high volatility periods. When Aggregated Open Interest STABLECOIN-margined indicator spikes, breaks out of a range or trend to the upside, it precedes large spikes in volatility as can be seen by price breaking out of its Bollinger bands. 

Traders who wish to hedge against volatility or stay delta neutral can consider this indicator to anticipate high volatility periods.

In conclusion, like the aggregate funding rate and predicted funding rate, the aggregated open interest indicators show traders the overall market positioning in futures contracts and perps and help one to understand the leveraging and bullishness in the market. 

Disclaimer: This article is not investment advice. Note that cryptocurrencies are highly volatile assets and very risky investments. Do your research or consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.

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