As the Bitcoin (BTC) and Ethereum (ETH) rally continues to gather momentum, we are witnessing a surge in open interest for both assets, reminiscent of the feverish days of the 2021 rally. This surge in trading activity is a clear indication that the bull market is well underway. However, the similarities to 2021 also raise concerns that the market may be overheating, leading to potential volatility in BTC and ETH prices in the near future.
While we are still far from reaching the all-time highs that we will likely see later in the cycle, it would be wise for overly enthusiastic investors to exercise caution at these lofty price levels. Bitcoin has experienced a more than 50% increase in the past 30 days and is approaching its all-time high, while Ethereum has seen a staggering 50% rise during the same period.
But it’s not just the rapid price appreciation that suggests imminent volatility in these two major cryptocurrencies. Technical indicators such as open interest and Bitcoin funding rates, when taken together, indicate a market that is becoming frothy.
Last week, the funding rates for Bitcoin perpetual futures listed on Binance exceeded 100% for the first time in at least a year, indicating a skew towards bullish leverage. Additionally, the rising open interest signifies a significant increase in the volume of open Bitcoin and Ethereum derivative positions on exchanges, including both long and short positions in futures or options contracts. These high funding rates, extreme price movements, and rising open interest often serve as warning signs for traders, especially those using leverage.
On March 4, the open interest in Bitcoin reached $31 billion, surpassing the previous record of $24.3 billion set on April 14, 2021. At that time, Bitcoin’s price was close to current levels, opening at $63,524 before experiencing a 23% drop to $49,078 by April 26, 2021.
Meanwhile, the open interest in ETH futures was around $12 billion as of March 4, approaching the peak of $13 billion seen on November 9, 2021, when ETH reached an all-time high of $4,810. By November 19, ETH had fallen to $3,996, a 17% decline from its peak.
Drawing parallels with 2021, it is evident that BTC and ETH are in need of a breather. Bitcoin has surged more than 180% over the past year leading up to March 4, surpassing its previous record in several major currencies. On the other hand, ETH has lagged behind, rising more than 120% in the same 12-month period.
There are several factors contributing to Ether’s slower price movements compared to Bitcoin, including the fact that the deadline for the approval of a spot ETH ETF is still a few months away. We can expect further price appreciation leading up to this significant decision. Similarly, the upcoming Bitcoin halving, scheduled for next month, is likely to act as a catalyst for further price increases, based on historical patterns.
Therefore, the rising open interest and funding rates do not alter the fundamentals of BTC and ETH – new all-time highs are still highly likely in this cycle. They simply indicate that the crypto market may be getting ahead of itself. This frenzied trading is not just limited to professional traders or long-term crypto believers; it also reflects a rise in FOMO (fear of missing out), which is a precarious situation that can easily collapse in the short term.
In such frothy markets, it is crucial to have a solid strategy and stick to it, without allowing emotions to cloud judgment. For options traders, this means paying attention to charts and data, rather than just focusing on positive price movements. For long-term investors, it is important to remember that crypto is a volatile asset class, and further volatility should be expected.
Most importantly, this serves as a reminder to everyone involved in crypto to remain calm and avoid getting caught up in the excitement of assets nearing their all-time highs. There will be plenty more opportunities for excitement in the coming months. Those who can maintain their composure amidst market turbulence are likely to be the most successful in this bull run.