Quant Explains How Bitcoin Derivatives Data Can Be Used For Trading

A quant has explained how the data of the Bitcoin derivatives indicators like open interest and liquidations can be leveraged as a short-term trading tool.

Bitcoin Derivatives Market Data As A Short-Term Trading Tool

As explained by an analyst in a CryptoQuant post, yesterday’s price action was a good example of how the futures market influences the value of the cryptocurrency. There are two relevant indicators here. The first is the “open interest,” which measures the total amount of Bitcoin futures contracts that are currently open on all derivative exchanges.

When the value of this metric trends up, it means investors are opening up more contracts on the futures market currently. Since more contracts generally accompany increased leverage as well, the open interest going up can cause a higher amount of volatility for the BTC price.

On the other hand, decreasing values of the indicators imply holders are closing up their contracts or getting forcefully liquidated right now. As this naturally leads to lower leverage in the market, BTC could follow up with less volatility.

The other metric of interest here is the “long/short liquidations,” which measures the total amount of long/short contracts (in USD) that are being forcefully closed off by exchanges as a result of investors accumulating losses that have eaten away a specific percentage of their collateral.

Now, here is a chart that shows the zoomed-in trend of the Bitcoin open interest and futures liquidations, as well as the BTC price, during the action seen yesterday:

In the above graph, the quant has marked how the Bitcoin open interest and futures liquidations (both long and short) related to the price of the cryptocurrency through each portion of yesterday’s burst of price action.

At first, the price was going down, but the open interest was increasing in value, suggesting that short positions were piling up on the market. Then, in a sudden upwards price move, a large amount of these shorts were liquidated, which only fueled the price surge further.

Naturally, the open interest declined as this move took place, because of all the short liquidations. After this steep climb, the price fell back to sideways movement, but the open interest started climbing. The analyst notes that this suggests investors had begun to open up long positions because of FOMO induced by the sudden rise.

Finally, the Bitcoin price reversed its direction, resulting in these now piled-up longs getting liquidated in the same way as shorts did earlier, which again only amplified the move and caused BTC to see an extended drawdown.

BTC Price

At the time of writing, Bitcoin is trading around $22,100, down 4% in the last week.